Speaking ahead of the Tanker Shipping & Trade Conference in November, chemical tanker expert Charles Lawrie* notes that while the supply side is benign, problems lie elsewhere
Charles Lawrie has been an impartial observer of the tanker sector of the shipping industry for decades. He and Jacqueline Richardson founded Richardson Lawrie Associates (RLA) in 1987 as a consultancy on oil, chemicals, LPG and LNG transportation and distribution. Over the decades the fiercely independent consultancy has developed a logistics consultancy line with the growth of that discipline in the chemical business and a tanker pool arm.
Mr Lawrie is in demand as a public speaker and hosts RLA’s tanker operations and industry analysis training seminars. In an exclusive Tanker Shipping & Trade interview, he laid out his thoughts on the developments in the chemical tanker market so far in 2019 and what delegates can expect from his presentation at the 2019 Tanker Shipping & Trade Conference, Awards and Exhibition in November 2019.
The main body of his presentation will focus on developments in the chemical tanker market in 2019: how trade has been progressing, developments in the supply side, and the behaviour of rates. As regular attendees of the Tanker Shipping & Trade Conference, Awards and Exhibition know, Mr Lawrie also gives a projection of the direction of rates based on RLA econometric models and compares these projections on a year-on-year basis.
Before discussing developments in the chemical tanker market so far in 2019, he notes that: “I do not recall a period in time when we have had so many external pressures on the market. It has been barely noticed outside of the chemical tanker trades, but there is a hugely influential trade dispute between South Korea and Japan taking place at the moment. Far more talked about is the US – China Trade War, and then there is the series of tanker incidents and threats to trade in the Middle East. Not to mention Venezuela and Libya. The word “uncertainty” underplays the geopolitical outlook.”
That said, RLA notes that the commodity chemicals trade to the middle of the year is up compared to the same period in 2018. US exports are up by 14%, but the counter-balance is that US imports are down by 11% year-on-year. On the North East Asia trades, Japanese deep-sea imports are up by 11%, with South Korean imports down by 12% and Taiwan up by 19%.
According to Mr Lawrie, the most important thing to consider is that Chinese deep-sea imports are up by 16%. China is trying to avert a fall in its growth rate and the petrochemical sector is an area that is being developed and receiving significant funds. Perhaps more importantly, short-sea imports of these products were down by almost 6%.
Taking these elements into consideration, RLA estimates the global deep-sea chemical tanker trade will increase by 3.8% per annum by 2023, although this could be significantly impacted by the deteriorating global economic outlook. This level of growth is less than RLA had estimated a year ago. There are many reasons for the variation, but the major uncertainty underlying that growth is the ethanol trade. Originally, China had planned to introduce E10 gasoline (gasoline composed of 10% ethanol). Given that Chinese demand for gasoline is substantial and there are not that many ethanol producers, RLA foresaw a rise in imports. One of the main producers and exporters of ethanol is the USA and methanol volumes have been dampened by the ongoing dispute between the two countries, with quite a few Chinese-backed US methanol projects for exports to China being put on hold.
There were highlights in the chemical trades, with RLA noting that so far this year, earnings on the trans-Pacific and trans-Atlantic speciality and commodity trades out of the US Gulf have either been in line with or exceeded RLA’s expectations. Middle East to Far East commodity chemical rates have been lower than expected and the same is true for rates for speciality chemicals from Europe to the Far East, says Mr Lawrie.
RLA uses two main scenarios for its analysis of the chemical tanker fleet orderbook: “Our base case is firm newbuilding orders that are destined for the chemical sector. The upside scenario includes those vessels that we are uncertain as to where they will trade (the CPP/chemicals swing tonnage). Adding the two together gives us an orderbook around 12% of the current fleet. The base case alone is around 9% of the current fleet. In historical terms, it is a fairly small orderbook-to-current-fleet ratio,” says Mr Lawrie.
He points out that the orderbook-to-current-fleet ratio has been lower and fell to around 4% for the base case only six years ago. But in the current context of 9.3%, the base case is still historically low. “My sense is that we have not reached the inflexion point yet,” he explains. “There is a lot of caution among owners for a variety of reasons. The main reason is “what is the specification of a newbuilding?”
The chemical tanker fleet is relatively homogenous: chemical tankers do not undergo radical size changes like the liner sector. They are like crude oil tankers in that the size ranges stay much the same, with incremental changes.
“In the chemical tanker sector the focus has been on the number of segregations,” says Mr Lawrie. “Today, the question is more fundamental. What will my GHG profile be in 2030? What propulsion system do I need to meet zero carbon in 2050? Should I be looking at LNG, or beyond LNG to ammonia or hydrogen? Bearing in mind a chemical tanker can easily trade 25 years, this means there is only five years in which to settle on a specification.”
From a fleet development point of view this conundrum has stalled chemical tanker ordering and may have also impacted scrapping this year. “I think a lot of owners are waiting to see what happens with IMO 2020 and will then consider the ballast water treatment issue. That could be the point that some of the older vessels or less financially viable vessels leave the fleet,” says Mr Lawrie.
According to RLA, there is a substantial volume of base case vessels due for delivery in 2020. Mr Lawrie says: “This will have a dampening effect, which of course, could be mitigated in the CPP sector by the demand for marine fuel transportation during the IMO 2020 marine fuel sulphur cap transition. We will have to wait and see.”
*Richardson Lawrie Associates director Charles Lawrie will be speaking alongside E.A. Gibson Shipbrokers’ Richard Matthews and Braemar ACM Shipbroking’s Henry Curra in a session themed ‘Tanker Business. Tanker Economics. Tanker Strategy’ at the November 26-27 Tanker Shipping & Trade Conference in London. For more information on the Tanker Shipping & Trade Conference please see: www.tankershippingconference.com