Chemical Shipping – Five Things To Look Out For In 2018 – Market Commentary
[London, January 2018] – 2017 was the year that saw Traders, Shipowners, Charterers and Shipbrokers in an increasingly competitive market, where supply outweighed demand and geo-political uncertainty, coupled with other uncertainties left the market feeling less than optimistic at the turn of the year.
While the specialized tanker market may be somewhat less guided by straight forward analyses of supply and demand, when compared with other shipping sectors; the world economy, currency fluctuations, geo-political tensions, crude oil prices and government regulations, to name a few, are certainly factors worth taking into consideration, alongside market specific dynamics. All in all, telling of what Charterers and Shipowners’ can expect in 2018. Here are five things to ponder:
1) GLOBAL ECONOMY
According to the World Bank, the global economy is expected to rise by 3.1% in 2018, up from the projected 3% in 2017. Prospects in emerging and developing market economies have improved with growth expected to increase by 4.5% compared to last year’s 4.3%. Data for the first nine months of 2017 showed that China’s appetite for petrochemicals consumption picked up. Meanwhile volumes are expected to grow or remain stable in most trade lanes. Key takeaway: Trades into and within Asia will continue to grow in 2018, with average growth rates likely to top 5%, a figure higher than that of the global average. Territories with increased demand for volume include South America, West Africa, Australia and New Zealand, where imports have increased substantially. This may present opportunities for traders open to expanding into new markets.
2) CONSTRUCTION OF NEW CHEMICAL OUTPUT
The global petrochemical capacity stands at about 568.3M tpa. North America will continue to be the focus for global petrochemical construction activity in the coming years with more foreign-based companies investing in the region. North America, with its advantage of cheap feedstocks, is drawing not only local companies but internationals ones as well. Key takeaway: Global capacity increased in 2017 by around 11.0M tpa, or 1.9% with new plants coming online in regions such as the Middle East, NE Asia the US. NE Asia is mainly an import region, and the majority of new local production will be consumed domestically. While new production facilities in NE Asia may slightly dampen long haul demand for imports into the Far East, domestic production is unlikely to meet all the regions requirements, so demand for tonnage will continue. Middle East and North American producers are likely to compete with SE Asian producers for market share in China and India.
3) VESSEL CAPACITY
A lot of Owners were conservative with placing orders during 2017. According to experts, this is largely due to a reduction in banks and private equity houses raising capital within the specialized sector. This could imply that there is a weakened sentiment amongst Owners and financiers. However, Owners do not appear to have completely lost their appetite for newbuilds. There were around 120 chemical vessels ordered in 2017. More deliveries in most deadweight size-ranges will be entering the market in 2018. Though based on the current orderbook, it is evident that there will be fewer deliveries from 2020 onwards. In speaking to the market we hear that consolidation has been on the rise, with joint ventures and pools for stainless steel vessels in all size ranges on the up. In November for example, Odfjell SE signed an agreement Sinochem Shipping Singapore Pte. Ltd to pool eight 40,900 dwt chemical tankers, managed by Odfjell SE and trading as part of the Odfjell Tankers fleet. In theory, this could support an upward trend in spot rates, although historically it has not tended to be the case. Key takeaway: The global chemical fleet grew annually by 3% between 2012 and 2017 in terms of dwt. The fleet is further expected to rise by 3% y-o-y in 2018. Based on the current orderbook schedule and accounting for future scrapping (at 1% of the previous period fleet), it is expected we will see a net increase to the fleet in 2018-19. To achieve better economies of scale there has been a trend towards acquiring larger ships. The 25-35K dwt size category is expected to grow 3.8% and 35-45K dwt size category is expected to increase by 4.4% over the next 3 years (by dwt). Notably, the intermediate size 19-25K dwt category is expected to grow by 21.5%. About 0.4M dwt of vessels have been scrapped in 2017 and 1.3M or 1% of the global fleet was 25 years or older. That said, the chemical sector is fairly unique in that it is never dramatically affected by the swings in added volumes or additional trade lanes opening up. In other words, freight rates are fairly stable on a day-to-day basis when compared with other shipping sectors. This is seen by the fact that despite a 24% increase (by dwt) in the global chemical fleet, (under 54.5K dwt), over the past 10 years and the addition of over a million tonnes of specialized product, the freight rates tend to have more stability – in comparison to other sectors such as dry cargo and offshore – in part due to the flexible nature of parcel tankers, which are able to move between different product markets.
4) FREIGHT RATES AND BUNKER PRICES
The shipping industry faced a sharp rise in bunker prices in 2017 and a steady increase in OPEX costs. The price of marine fuel is the most volatile component, which has huge impact on freight rates, accounting for as much as 50% of a vessel’s total voyage costs. Oil prices recovered in 2017 and were around the mid $60 /bbl in December 2017. This was up from just over $30/bbl at the start of 2016, leading to an increase in bunkers from $160/t to $390/t over the same time frame. The average bunker price in 2017 was 40% higher than in 2016.Chemical volumes also increased in 2017, all of which should have translated into firmer freight rates. However, despite the upward pressures, chemical freight rates on average were lower in 2017 than they were in 2016 across all major trade routes as excess tonnage far outweighed the increase in volumes and the extra voyage costs. The immediate impact has been on Owners’/Operators’ earnings, as the highly competitive tonnage market meant they were unable to push the average rates up. Key takeaway: Freight rates have struggled to recover due to tonnage supply outweighing the demand for them. Furthermore, OPECs agreement with non-OPEC countries in November 2017 to extend its imposed oil-output cuts until the end of 2018, restricting daily quotas, is likely to keep an upward pressure on crude prices. Bunker prices are likely to remain high in view of firm crude oil price forecasts for 2018, which means Shipowners’ earnings will remain under pressure this year. Despite fleet growth slowing in 2018, it is unlikely to be significant enough to enable Owners to push up freight rates as the increase in volumes is likely to struggle to absorb the extra capacity.
Long vs Short-haul: Demand for chemical imports to NE Asia has been a key driver for chemical trades with NE Asia having increased its imports by 30% since 2011, an growth of 14.29M tonnes.Imports from East of the Suez, which accounts for short and medium haul trade (NE Asia, Middle East and SE Asia) makes up 86% of total imports into NE Asia, an increase from 83% in 2016. Meanwhile long-haul imports to NE Asia, mainly from the North, Central, South America and Europe, decreased from 13% in 2016 to 11% in 2017, as importers look to neighbouring countries for product. Having said that, even the Middle East has seen its market share drop from 33% to 25.6% despite exporting the same amount of volumes into NE Asia over the last 7 years. Key takeaway: Demand in Asia is likely to continue to grow in 2018. East Asian routes have benefitted from the slight increase in volumes, taking market share from the North and Central / South America. This is opening up more opportunities for short and medium sea shipping. The general sentiment we are hearing from most Owners is that 2018 will be no worse than 2017, but we will likely have to wait until 2019 for a ‘recovery’.