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Sunday, November 18, 2018

Bullish forecast for chemical tanker market foreseen by Lorentzen & Stemoco

Under the title 'Something is missing, but more are coming' Lorentzen & Stemoco has given the following bullish forecast for the chemical market in its weekly report.  

After an exceptionally strong performance last year, the chemical tanker market lost some of its steam during the first half of this year. Whilst freight rates on major routes into the Far East, measured in dollars per ton, soared 50% in 2004, they dropped by over 20% during the first half of 2005.  

What has been particularly notable about the chemical tanker market in the past few years is the strong growth in the organic chemical and vegetable oil trades, which are the two main drivers of strong chemical tonnage demand. The world organic chemical trade has been growing at the rate of 4% per year since 2000, and the growth rate for vegetable oils has been 7% per year. The trade volumes of organic chemicals and vegetable oils account for nearly 80% of all the cargoes carried by chemical tankers. 

As in many other instances, China has turned out to be the major power behind the strong growth. Since 2000, China's imports of organic chemicals have been growing at the rate of 19% per year on average, while imports of vegetable oils have increased by 23% per year. During the same period, China doubled its share in global trade volume of organic chemicals (from 13% in 2000 to 25% in 2004) and vegoils (from 9% in 2000 to 19% in 2004). So far this year, however, we have seen less growth in Chinese imports of organic chemicals and vegetable oils. The growth in imports of organic chemicals decreased by 5% compared to the same period last year and imports of vegetable oils decreased by 2%. 

The reason for the absence of strong Chinese imports this year is multi-faceted. First, due to a volatile commodity market and historically high crude oil prices, buyers have refrained from purchasing large volumes in the expectation of slower demand growth as the Chinese government continues its effort to cool down the economy. Second, changes in the sourcing pattern for organic chemicals have led to shorter voyage distances - as volumes go down, tonnage demand follows suit.  

Looking forward, as production capacity for organic chemicals in other regions shows little growth, Middle Eastern and Asian countries are expected to be the main contributors to an annual growth of 5% in world organic chemical production capacity. The Middle East is expected to more than double its organic capacity by the end of 2008, and capacity in Asian countries will also increase by 30%. China plans to double its organic capacity within 4 years - growth in China should account for 60% of the total expansion in Asia. While domestic expansion could lessen demand for Chinese imports, the shift in import sources from North America and Europe to the Middle East Gulf (MEG) and increasing intra-Asian trade may lead to shorter voyage distances and lower ton-mile demand. 

A weak clean product tanker market is also bad for the chemical tanker market, because more product tankers will be competing for simple chemicals and vegetable oils. The Baltic Exchange clean tanker index has decreased by almost 40% so far this year, with competition from product tankers having exerting a bearish influence on the chemical tanker market. 

Nevertheless, it should be noted that the chemical tanker market has, as part of the broader picture, shown great resilience. Despite a 20% drop in freight rates, the current level is still well above that of the same period last year, which is a fact to be much envied by the drybulk and crude tanker markets. It shows that the chemical tanker market is relatively tighter than other markets. 

The good news is that we can expect the tight chemical tanker market to continue into the future! The revised MARPOL Regulation 13G sets out a stricter timetable for the phasing-out of single-hull tankers. According to the new amendments all single-hull tankers will be phased out by 2010. Owners of single-hull product tankers will likely find it more difficult to find sufficient cargo to run their operations economically. 

The removal of single-hull product tankers will tighten the product tanker market, which could decrease the product tankers’ appetite for chemical cargoes. Starting from January 2007, the revision of MARPOL Annex II will prevent single-hull product tankers from carrying vegetable oils, and chemical tankers will therefore benefit from less competition.  

All this points to a tight chemical tanker supply down the road! For the near future, Chinese buyers traditionally come back to the market after summer to stock up for the second half of the year. The second quarter Chinese Gross Domestic Product (GDP) figure of 9.5% shows that the economy is still very robust and hence the demand for imported raw materials should continue to stay strong. An improving living standard will also keep the consumption of vegetable oils high. The latest revaluation of the Chinese Renminbi (RMB) will lower the cost of raw materials for Chinese buyers. These positive factors should help to stimulate growth in the chemical market.

Contact: Erik Ranheim