Product tanker supply is weakened by scrubber and BWMS retrofits while demand is growing due to new Chinese output. But will this be dampened by the coronavirus?
The general consensus from shipbrokers and independent shipping analysts is for positive growth in product tanker demand growth in 2020 and 2021. Clarkson Research Services’ (CRS) projection is for dwt demand to grow by 4-5% on the back of IMO’s 2020 marine fuel sulphur cap. The initial boost in demand is expected to then tail off once production of very low sulphur fuel oil (VLSFO) is in place. Demand growth phase two will commence with the movement of gasoil from the US, Middle East and Far East providing underlying support for the product tanker trade.
CRS’ product tanker demand projection of 2.5% growth in 2021 hinges on growth in oil products output from the new refineries in the Middle East and Far East.
SSY, which claims to be the world’s largest independent shipbroker, noted a fundamental switch in the China oil products output which will impact product tanker demand. “China issued 28M tonnes of products export quotas for 2020 in the first batch of quotas for the year. This was up by 6.5M tonnes on the first round of quotas in 2019. For the first time the quotas do not specify the breakdown of products, allowing refiners to determine the volume of exports of each product.”
The increase in the latest quotas has been allocated to the state-owned refiners. In a bid to maintain low prices and raise quality of output, the government has also signalled that the next round of quotas in 2020 will include independent refiners. This will strip away some of the protection the state-owned petrochemical giants have enjoyed in the domestic market, which some say has delayed their upgrading of facilities. Expanding the quotas to the independent sector will put the state-supported refiners in direct competition with new and more sophisticated refineries built by the private sector. Between 2016 and 2019, the country added approximately 2.4M b/d of crude distillation capacity according to SSY estimates.
The increase in quotas will also increase China’s crude oil imports. According to CRS, in 2019 “Chinese crude imports totalled 10.8M b/d, up 4% year-on-year, supported by the ramp-up of the second crude distillation unit at the 0.4M b/d Zhejiang Petrochemical refinery, and attempts by ‘teapot’ refiners to use up allocated crude import quotas ahead of their expiry at end 2019. In full year 2019, China’s seaborne crude imports grew by an estimated 10.6% year-on-year to 9.2M b/d.”
China’s oil products output of lighter products and better quality is ramping up during a phase of slowing domestic demand. As a result, China is scheduled to be an over-achiever on the domestic oil products production front. As it is, Chinese oil products exports are finding new markets. Africa is a small but growing market for Chinese product exports. From January to November 2019 ,China exported 330,000 tonnes of gasoline to Africa, mostly to Nigeria.
China’s expanding oil products output will provide one springboard for growth in product tanker demand, another driver is the expanding demand for low sulphur feedstock to blend into VLSFO. ClipperData, which provides insights into global crude and refined product movements, notes in its latest analysis that “Brazil is a LSFO producer with a typical sulphur specification of around 0.7%. Blenders can easily mix that specification down to 0.5%S, making Brazilian fuel oil valuable for a post-2020 bunker market.”
The Atlantic Basin is also likely to increase product tanker demand growth, with ClipperData noting “More light-sweet West African crude is heading into Europe, as refiners attempt to increase their light product production at the expense of their traditional high sulphur fuel oil (HSFO) yield.”
There will be winners and losers. ClipperData reports “Refiners with a relatively high Nelson Complexity Index (NCI) will have more options than those with a low NCI, which will be restricted in what they can do to adjust their crude intake and product yield.”
It compares the NCI of the Reliance refinery in India with that of Motor Oils Hellas refinery in Greece, noting that the higher NCI of the Reliance refinery means it can be “…less discerning about (crude oil) grades, pulling in more or fewer light to medium barrels, depending on the movement in price spreads.”
The generally rosy picture on the product tanker demand side contrasts with a mixed picture on the supply side. The total crude and product tanker fleet grew and there were pockets of growth in different sectors. SSY noted “The combined crude and product tanker fleet (10,000+ dwt) expanded by 5.9% in 2019, its fastest pace in eight years. At 68 vessels, VLCC arrivals were the highest annual total in SSY records dating back to 1990. In the clean sector, LR2 deliveries were at a 10-year high while MRs were at a four-year high.”
CRS has taken a deep dive into the product tanker fleet growth figures to try and assess the actual fleet available to work. Shipping analysts are aware that there can never be a 100% active fleet: there will always be tankers in lay-up, idle and in drydock. The later activity has become more prevalent than during any other shipping cycle due to the combination of IMO 2020 scrubber retrofits and ballast water treatment retrofits.
According to CRS, as at the start of 2020 there were 220 vessels (7% of the product tanker fleet) fitted with scrubbers and 98 product tankers have been identified by CRS as pending fitment (3% of the fleet). This translates to a positive outlook. “The outlook for the product tanker market appears positive in 2020, with ‘trading’ fleet growth expected to slow to 2.4%, and time out of service for scrubber retrofits expected to absorb an average of 0.7% of products fleet capacity this year, up from 0.5% in 2019”.
Looking ahead, CRS has identified that approximately 39% of the product tankers on order are specified with scrubbers. There is also one LNG-powered product tanker in the fleet with another nine on order.
Looking toward 2021, CRS notes “Initial projections suggest a further slowdown in product tanker supply growth to just 1.2% in 2021, reflecting the historically limited orderbook, equivalent to just 6.5% of fleet capacity.”
The demand and supply projections resolve into a 2020 product tanker market balance of 2% in 2020 and 1% in 2021 in favour of demand. This suggests a favourable environment for product tanker owners and operators, if it was not for the known unknown of the coronavirus.
The immediate impact of the coronavirus was for China to shut down travel during the extended Chinese New Year celebrations, followed rapidly by containment actions in China and across the world. This will have an impact on Chinese and global crude oil demand and by extension, the demand for product tankers. The key economic reaction on all tanker trades is the impact on the price of crude oil.
BP’s Brian Gilvary was part of the team in BP that reacted to the impact of the SARS virus outbreak in 2002/2003. He is now the oil giant’s chief financial officer and when speaking on CNBC as the crude oil price dipped toward US$50/bbl, he estimated that the impact of the coronavirus will be to remove 300,000-500,000 b/d demand for crude oil. He noted that based on the SARS experience, OPEC will manage the situation by rolling forward production cuts in 2020 to compensate for the fall in demand and maintain a crude oil price in the region of US$65/bbl.
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