Charles Lawrie, founder and managing director of chemical carrier and product tanker analysts Richardson Lawrie Associates, looks back at 2019 and previews what is likely to be a fascinating 2020
Speaking at the Tanker Shipping & Trade conference in November 2019, Charles Lawrie prefaced his presentation by noting the range of externalities that are currently impacting the deep-sea chemical carrier sector. These include civil unrest in some countries, trade barriers being imposed between the USA and China and the ongoing hostilities in the Middle East Gulf.
The headline summary of these is a slowdown in economic growth, and this will continue into 2020. That said, Richardson Lawrie Associates’ (RLA) analysis of deep-sea chemical carrier trades points to a slight increase in growth in 2019. Most of this growth has come from organic chemical tanker trades. Of course, Mr Lawrie warned, there is a strong link to global economic growth, but that is only part of the equation and there are many other factors affecting the volume and pattern of trade. A major issue is the location and capacity of new refineries and chemical plants coming on line and this can impact the stream of commodities.
“In 2019, [we saw] 28 new plants coming on line,” said Mr Lawrie, “and a similar number of new projects have been announced this year.”
The main driver in deep-sea chemical trade was imports into China, noted Mr Lawrie. On the export side, the Middle East Gulf was strong in 2019, despite the turmoil in the region.
There were other changes to trade routes of note. The commodity chemical trade out of the US was firm in 2019. But if exports were firm, the same cannot be said for US deep-sea imports; in particular MTBE/ETBE and ethylene glycol. South Korea has increased deep-sea commodity chemical exports, but volumes from other North East Asian countries such as Japan and Taiwan have been weak.
China’s demand for deep-sea commodity chemicals has shown remarkable resilience, according to Mr Lawrie: Speaking late last year he said: “So far this year (Chinese) imports have been running at about 5%. On the deep-sea side, imports have been running at 18%. Methanol has been in demand, although ethanol – normally a key trade – has collapsed.”
Ethanol imports from the US to China in 2018 were around 312,000 tonnes. In 2019, Chinese imports of ethanol were virtually zero. “This is no surprise, as the traditional source of Chinese ethanol imports has been the US,” said Mr Lawrie.
The lack of ethanol imports into China has important implications for the Chinese government’s long term goals. “The likelihood is that China will miss its goal of introducing E-10 gasoline, a fuel with 10% ethanol content,” said Mr Lawrie. This is part of China’s environmental reform package, which includes reducing demand for MTBE, but China does not possess the capacity to produce the required amounts of ethanol domestically. “This would have required 11M tonnes of ethanol to meet requirements – this would have had to been met with imports,” said Mr Lawrie. This element is almost unforecastable, given the US’s frequently changing tone on the tariff trade negotiations.
Fleet Supply: The rise of removals
Up to the mid-point of November 2019 around 0.5M dwt of chemical carriers had been removed from the fleet, either through recycling/scrapping or by trading in shipping sectors other than the chemical trades. “There has been a fair balance between vessels leaving the market and those joining the market,” said Mr Lawrie.
Mr Lawrie noted that the deep-sea fleet is relatively young, but also just over 11% of the fleet was more than 20 years old. Some of these vessels are well-regarded stainless-steel ships with multiple segregations. Mr Lawrie commented: “Another big question mark hangs over vessels between 15 and 20-years of age (approximately 3M dwt) facing the next Special Survey and the need to invest in ballast water treatment systems (BWMS) – will those vessels be scrapped or have [BWMS] installed?”
On the earnings side, Mr Lawrie was cautiously optimistic: “I don’t wish to over-play this, but next year could be a turning point,” he said. He noted that there has been an upward trend in earnings in the easichem sector. This is partly due to lower-than-expected bunker costs underpinning earnings.
He also noted that stainless-steel transpacific earnings were lower: “I think this is a function of the dispute between the USA and China,” he said. Taking the CPP market into account did raise earnings in 2019 and overall average earnings for owners were up.
RLA estimate that in the deep-sea chemical base case current orderbook, which excludes product tankers capable of carrying chemicals, is 1.9M dwt, or 8% of the existing fleet: “This is not that high by historical standards,” said Mr Lawrie. Including the ‘upside case’ vessels, the orderbook is around 10% of the existing fleet. If orderbook growth slows the level may decline toward the historical lows of an orderbook of around 5% of the fleet. A key factor will be the number of chemical carriers that are ordered versus the non-pure chemical-(CPP) capable vessels. These are often not separated out of the orderbook or general analysis of the chemical carrier fleet, but this is an important distinction that RLA makes in its analysis.
This can distort the earnings of chemical carriers, especially in the spot trades. Mr Lawrie noted that there has been a downward trend in CPP-capable tankers entering the chemical carrier spot market. One exception was the chemical trade out of the US Gulf to Asia, where RLA has recorded up to 20% of the trade has been carried by swing supply of the non-chemical carrier tankers to November last year.
The final message Mr Lawrie had for the conference focused on collaboration. If there was one thing that IMO 2020 and the BWM Convention has shown owners it is that technological changes require high levels of investment to develop the technology, install, train and operate successfully. The next development toward a low- or zero-carbon future will require even higher levels of investment. Like the car industry, the shipping industry is going to have to accept collaboration if it is to meet these aims.
RLA teams up with Wade Maritime
Richard Lawrie Associates (RLA) took the opportunity of presenting at the 2019 Tanker Shipping & Trade conference to announce the completion of a merger with the Wade Maritime Group. The merger will marry the complimentary aspects of the two businesses. Wade Maritime is a management risk and contract risk specialist and RLA provides maritime economics and business consulting services, including the chemical carrier, oil tanker and gas carrier markets, trading risk management services and training. Wade Maritime was set up by a former member of the RLA team. RLA now has offices in London, Singapore and India.