BRS looks at the chemship market

BIGGER AND BETTER

MARKET • CHEMICAL TANKERS DID PRETTY WELL LAST YEAR BUT HOW WILL THE SECTOR RECOVER FROM COVID-19, IMO 2020 AND OTHER CHALLENGES? BRS HAS SOME POINTERS

THE COVID-19 PANDEMIC “smashed” the global economy in the first half of 2020 and it will be a long time before it gets back to pre-pandemic levels, especially in the western hemisphere. China is likely to be the only major economy to get back to ‘normal’ this year, with the Atlantic basin probably waiting until the second half of 2022.

These predictions, which underpin any analysis of global chemical trade and the resulting demand for chemical tanker capacity, were made by Andrew Wilson, head of energy and tanker research at BRS Brokers, during the IV Med Hub Day, organised by Port Tarragona and ChemMed and held virtually this past 19 and 20 November. Wilson had been invited to give his views on the impact of Covid-19 and other disruptions during 2020 on the Mediterranean tanker market, which he felt will be “difficult” over the next year or two.

One important result of the Covid-19 pandemic has been a sharp decline in demand for road fuels; this followed immediately after refiners had been taking advantage of low oil prices to run their assets fast early in 2020, which has left them with high stocks. “A lot of plants are now under threat,” Wilson said: some that have been shuttered may never re-open, he predicted.

SHIFTING SUPPLIES Ageing refineries in the mature markets in Europe and North America will in any case struggle to compete with new, more efficient plants now opening up – and these are overwhelmingly in Asia. Wilson said that 91 per cent of new capacity due to open in 2021 is located east of Suez. That will follow on from two new 400,000 bpd refineries opening in December 2020, one in Saudi Arabia and one in China, both of which are highly integrated with downstream petrochemical facilities.

In order to balance the market, Europe needs to lose 2m bpd of refinery capacity and older, smaller and less efficient plants will have to go, Wilson said. Those with integrated petrochemical production will remain and others located in strategic hubs will have an advantage.

Significantly for the product and chemical tanker markets, this move towards integrated ‘mega-plants’, especially in the Middle East and China, will mean a move towards larger parcel sizes, a trend that Wilson said will continue over the coming decade.

And significantly for the Mediterranean market, China’s Belt & Road initiative involves a maritime route that ends in the region. Hub ports in the Mediterranean will therefore look very attractive for both Chinese and US petrochemical producers looking for a location in Europe where they can break bulk from larger tankers for regional distribution in smaller parcels. This points to a need for more storage capacity in the Mediterranean, although it leaves the question as to whether these larger tankers will be able to find backhaul cargoes.

FUELLING THE FLEET The ‘IMO 2020’ rule, mandating a significant reduction in sulphur oxide emissions from ships as from the start of 2020, was “totally

eclipsed” by Covid-19, Wilson said. But the slump in demand meant that the anticipated problems with supplies of compliant very low-sulphur fuels did not emerge. Wilson reported that very low-sulphur grades are now supplying 70 per cent of global bunker demand, with 20 per cent of demand being met by high sulphur fuel oil. Generally low prices have also reduced the price differential between the two, making scrubber economics look shaky.

But shipowners are now having to consider what will be the bunker fuels of the future and how they will need to respond through retrofits or newbuilding. In this uncertainty, owners are reluctant to place newbuilding orders in case those new ships become obsolete before they have paid back their investment. The International Maritime Organisation (IMO) is eager to move to new fuels to reduce the environmental impact of shipping but those fuels are not yet ready, at least not in the volumes that will be required.

While Wilson felt that the situation will become clearer by 2022 or 2023, until then we can expect continued slow activity in the newbuilding sector and, as a result, the medium-term outlook for freight rates in most sectors is bullish. Similarly, scrapping remains unappealing. With rates at firm levels already and weak demand (and hence low prices) for scrap, owners are not getting value from the demolition market. Older tankers, particularly chemical and small product tankers, are more likely to be sold for further trading in roles such as bunkering vessels. Wilson predicted that the demolition sector will not pick up until 2022 to 2024, especially if prices remain weak.

WHAT IT MEANS FOR CHEMSHIPS Looking more specifically at the local market for smaller tankers, Wilson noted that product tanker rates peaked in the second quarter of 2020 but came off the peak quickly. That was not the case for chemical tankers, which retained their firmness and he expected 2020 to prove to be the best year for 5,000-dwt units since 2016.

However, there are still too many ships chasing too few chemical cargoes in the Mediterranean market and things could remain difficult for the next 12 to 24 months, Wilson said.

Overall, Wilson concluded, chemical tankers are moving up the size range, with larger vessels needed to handle the increase in long-haul trades and the larger parcel sizes being generated by the new breed of bigger petrochemical plants in the Middle East.

There is, though, still room for smaller, specialised owners. The chemical tanker market has plenty of niches where those with specific expertise can prosper. But he also felt that the sector is ripe for consolidation, not necessarily through mergers and acquisitions but rather through pools and joint ventures. “The next few months will see more such deals,” Wilson predicted.

He certainly knew what he was talking about; since then Odfjell has set up a new coated tanker pool and attracted tonnage from Navig8 Chemical Tankers and Transportation Recovery Fund (TRF); Stolt-Nielsen and John T Essberger have formed a joint venture, E&S Tankers, to combine their European parcel tanker fleets; and the Sogestran Group has entered the market with a majority stake in De Poli Tankers and the acquisition of Team Tankers International’s European fleet.

If Wilson is correct, then these announcements may not be the end of this latest phase of consolidation in the market. www.brsbrokers.com

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