Charterers face rising freight

HANDS IN POCKETS

MARKETS • SHIPPERS AND TRADERS CAN EXPECT TO PAY MORE FOR THEIR OCEAN FREIGHT AS FUNDAMENTALS SWING BACK IN FAVOUR OF CHEMICAL AND GAS TANKER OWNERS

IT HAS BEEN a long dark time for vessel owners in the chemical tanker business over the past decade. The market was full of optimism ahead of the 2008 financial crash and the orderbook overhang when demand suddenly evaporated persisted for several years. It is only now that the oversupply of vessels is beginning to unwind, due to a combination of a recovery in vessel demand and supply-side factors such as the scrapping of older vessels and restricted new contracting.

Things have been somewhat different in the gas tanker sector, with new LPG export streams from the US and the Middle East adding to tonne-mile demand, especially for larger vessels but also, thanks to growing regional trades and the need in Asia for transhipment from VLGCs to supply many ports, smaller semi-refrigerated and fully pressurised ships.

Furthermore, conditions remain bright. Odfjell notes, for instance, that the volume of new organic chemical production capacity due to come onstream in the US and Middle East over the coming year could add a further 5 per cent to overall tonne-mile demand, while on the LPG side new export projects in the US are continuing to provide new employment and support newbuilding orders in the VLGC sector.

OUTLOOK FOR CHEMICALS The other factor that needs to be taken into consideration is the arrival on 1 January 2020 of the new restrictions on sulphur oxides emissions from vessels – the so-called ‘IMO 2020’ rule – the impact of which is still uncertain. It is clear that there is likely to be an increase in the cost of bunkers as some owners switch to low-sulphur grades, and owners will do their best to pass these cost increases on to their customers. Furthermore, the cost of retrofitting scrubbers means that more older ships are likely to go for demolition, reducing vessel supply. Odfjell also notes that owners may resort to slow steaming to reduce emissions and IMO 2020 could also reduce the volume of swing tonnage in the chemical trades due to emerging petroleum product movements to ensure the right bunker fuels are available in the right place.

All of this means one thing for cargo interests: higher freight costs.

Stolt Tankers’ view on the chemical tanker sector is unequivocal: “The slowdown in new chemical tonnage entering the market, supported by increasing chemical demand and positive movements in the product tanker market, should improve fundamentals in the chemical tanker market for the next few years and provide upward potential for freight rates,” the company said in its halfyear results commentary. “The orderbook decreased from 11 per cent in June 2018 to »

7 per cent in June 2019. Without newbuilding orders, the demand growth is expected to absorb the fleet growth over the coming year.

“New chemical production in the US Gulf and Arabian Gulf is expected to increase chemical shipment demand, though impact on specific markets is uncertain considering the potential impact of protectionist policies.” Stolt agrees with Odfjell that IMO 2020 could improve utilisation in the product tanker market and result in swing tonnage moving out of the chemicals arena.

LARGER GAS VOLUMES Matters are rather more complex in the LPG shipping sector. Record exports of LPG from the US in the first half of this year, as more shale gas-sourced product has become available and terminal operators have added to capacity, have supported a significant upturn in freight rates for VLGCs and, for once, this has had a knock-on effect in the large and medium-sized gas carrier segments. Exmar notes that the small orderbook in the midsize sector, combined with rising cargo volumes of both LPG and ammonia, have resulted in stronger freight rates. “This upward trend in the market seen in recent months is expected to continue during the remainder of 2019 and 2020,” the operator says.

Navigator Gas says there will be a lag before this effect trickles down to the Handysize sector, where it is the strongest player, and that this segment has also been negatively impacted by global trade wars, with a number of its vessels having to exit the Venezuelan cabotage trade as a result of US sanctions. Furthermore, while the LPG market strengthened, the first half of this year saw the usually more consistent petrochemical gas market faltering in the face of a series of unforeseen events that restricted exports and terminal availability around the world.

Navigator Gas also points to a “larger than average turnaround season” in the chemical industry in Europe during the first half, which on the one hand increased demand for propylene imports – around 90,000 tonnes was moved in the second quarter alone – but a loss of butadiene availabilities for the EuropeAsia trade. The company says it expects to see Handysize carriers moving more into LPG trades as the year continues.

SMALL FRY One perhaps surprising impact of the surge in US LPG exports in recent years has been its impact on the smaller gas carrier sectors. While much of this is due to a vibrant regional market in the Caribbean and on trades to South America, Epic Gas reports that there were two long-haul exports to West Africa carried on fully pressurised ships.

Furthermore, the smaller gas ships have been kept busy east of Suez by strong import demand across Asia, and particularly in Thailand and Vietnam, as well as in South Africa. Propane and propylene imports into China remain strong, as the continued increase in propane dehydrogenation (PDH) capacity is outstripped by downstream demand.

Epic Gas also notes the impact on vessel demand from ship-to-ship operations, which have remained strong this year: it carried out 73 such operations in the second quarter, following on from 358 in 2018 as a whole, and notes an increase in the number of operations carried out in the Indian Ocean and East Africa.

Despite this strong demand, operations in the fully pressurised segment in Asia are currently being adversely affected by uncertainties arising from the US-China trade war. Michael Jolliffe, chairman of StealthGas, says the pressurised market in Asia “presented a relatively tough second quarter for shipowners” with charterers reluctant to conclude or renew period contracts. He does, though, believe that the Asian market will soon correct itself.

Without a repositioning cargo, owners will be reluctant to move their vessels back west of Suez, especially if they are anticipating a recovery. What that means is that vessel supply will remain tight in the European market, with little downward pressure on rates. Cargo interests cannot expect any help from shipowners in reducing their costs any time soon. HCB

BOTH THE CHEMICAL AND LPG TANKER MARKETS ARE

BENEFITTING FROM RISING MARITIME TRADE, WITH

MORE EXPORT-ORIENTED PRODUCTION CAPACITY DUE

ONSTREAM SHORTLY AND CONTINUED STRONG IMPORT

DEMAND IN THE EMERGING ASIAN ECONOMIES

39

YEARS

1980-2019