Space at what price?

13 June 2005 00:01  [Source: ACN]

New regulations, recently introduced by the IMO, are likely to transform the chemical and product tanker market.Malini Hariharan reports

 
The biggest uncertainty facing the chemical and product tanker market these days is the impact that the reclassification of vegetable oils and certain chemicals by the International Maritime Organisation (IMO) will have on space availability and freight rates.

The IMO introduced changes to the International Marine Pollution Convention (Marpol) Annex II and the International Code for the Construction and Equipment of Ships Carrying Dangerous Chemicals in Bulk (IBC Code) in October 2004. A new pollution category system was introduced and products, including some chemicals (see box) and vegetable oils were re-categorised. The new system will take effect from 1 January 2007.

Vegetable oils can currently be carried on any tanker, but from 2007, they will be able to move only in chemical tankers.

The revisions to Marpol Annex II had been under review at the IMO for over ten years. But now that a deadline has been set, there are concerns that the proposed changes could play havoc with the chemical-tanker market come 2007, as demand for strictly defined chemical space will increase.

The implications are big. Around 130.9m tonne of chemicals, oil, and fats and other products were shipped in tankers in 2003. Of this, the big movers, accounting for 107.5m tonne, were chemicals such as caustic soda, benzene, toluene, xylenes, methanol, and vegetable oils such as palm oil, soya bean oil, and cottonseed oil. Of the big movers, 15.9m tonne were inorganic chemicals, 46.3m tonne were organic chemicals, 39.3m were oils and fats, and 6m tonne were molasses.

Impact of new regulations

 
Many market players are still scratching their heads trying to figure out the precise impact of the new regulations.

‘No one seems to have a clear idea on how these [the new regulations] will affect the market. Certainly, there should be some upward pressure on freight rates, but it is not as if rates will suddenly double. There could be a short-term effect on certain products,’ says a shipowner.

A shipping industry source comments: ‘It is still too early to predict with any certainty, but it will make space tighter. At some point between now and then, rates will start to increase to reflect the restrictions.’

But he adds that a steep increase can be avoided if chemical demand falls or if there is excessive newbuilding.

Forecasting is difficult, as a number of products have not yet been re-evaluated by the IMO because of lack of data. The list includes chemicals such as pyrolysis gasoline and styrene. And unless the necessary information is submitted by the end of this year, the bulk transport of such products is likely to face substantial problems from 1 January 2007, says the Association of Independent Tanker Owners (Intertanko).

A bigger difficulty is getting information about a fragmented industry – there are too many shipowners with too many vessels spread all over the world. To get a clear picture of what can happen in the future as a result of the new regulations, complete information on all the ships, including the number and types of tanks on board, would be needed. But there is no single definitive source for this kind of data.

‘It is a closed market; information is not easy to come by,’ says the shipping industry source.

‘It is hard to figure out what will happen. Each owner knows what he is doing and can extrapolate that. But it is still a guessing game, as no one has all the facts.’

Intertanko had submitted a study to the IMO early last year to help in the decision-making. The study was aimed at obtaining updated information on IMO Type 2- and 3-cargo carrying capacity for the international tanker fleet, and to evaluate what effect the Marpol Annex II revisions will have on tonnage availability.

To arrive at a list that was as comprehensive as possible, Intertanko had to ask all its members for fleet information, including the types of tanks on board. Members were also asked to provide information on the different kinds of coatings used on the tanks as this would determine compatibility with various products.

An Intertanko source highlights another difficulty – the Federation of Oil Seeds and Fats Associations (Fosfa) has a rule that stipulates that vegetable oils cannot be loaded in a tanker if certain chemicals were previously carried in it, as they could be a possible source of contamination. What this means is that, even if a ship with an empty tank is available, it may not be able to take a vegetable-oil cargo because of its previous cargo.

Trying to factor these points to make a model that could be used to project the future is a big challenge, says the Intertanko source.

In the end, Intertanko confined its study to ships of over 10 000 dwt (deadweight tonne).

It used data on more than 1100 ships operated by 50 chemical product and tanker operators and also relied on agencies such as Drewry Shipping Consultants and Clarksons Shipping Services. Assumptions were also made on voyages per year and slack time for operational reasons.

The main finding was that there would be nominal surplus of Type 2 and Type 3 tonnage from 2007. The chemical tonnage of Type 2 and Type 3 in 2003 was estimated at 24.9m dwt, which is likely to grow by 3%/year to 27.3m dwt.

Demand in 2003 for Type 2 and Type 3 tonnage was estimated at 53.6m dwt, which would rise to 128.7m dwt in 2007.

Assuming an average eight voyages per tanker per year and 20% slack time, the surplus in 2007 would be 5.7m dwt.

But not everyone is convinced that this will be the case with some players predicting a tonnage deficit, especially in the vegetable-oil sector.

And while the Intertanko study was based on the most up-to-date information available at that time, changes have taken place in the shipping world since then, which means that the conclusions are to a certain extent outdated.

Latest study

The latest study on this issue is by Drewry. The study, titled Chemical and Product Tankers: Implications of IMO/Marpol Annex II Changes, concludes that IMO 2 tonnage would be in short supply if oil and fats were required to be transported only in this type of space.

However, if they can be transported in Type 3 space, provided it is double hulled and meets all other requirements, then there could be a nominal surplus of Type 2 space

Drewry predicts that IMO 3 ships of 35 000-45 000 dwt with double hulls and meeting the required stripping requirements would take up the most significant share of the vegetable-oil business in the long term.

As for chemicals such as benzene, paraxylene, styrene, methanol, MTBE, and ethylene dichloride, Drewry expects the changes in the status of these cargoes (see table) to have a firming effect on the freight market. While, to a degree, EDC, styrene, benzene, and caustic soda solution will continue to be carried on IMO 2 or 3 tonnage, there will be some erosion on availability as some ships will be unable to meet the new stripping and other requirements, it says.

Methanol and MTBE are likely to face greater pressure for space as the number of methanol ships will be reduced until new vessels are built or converted for dedicated trade.

Drewry concludes that a major share of oil and fats shipping will, in the future, be carried out on Type 3 double-hulled tonnage that has been put in place over the years.

Owners and operators of such tonnage will be in a strong position to take advantage of what should be a healthy freight market, as supply and demand will be in closer balance than has been the case over the years.

Marpol Annex II Revisions

The current International Code for the Construction and Equipment of Ships Carrying Dangerous Chemicals in Bulk (IBC Code) contains five categories – A, B, C, D and an Appendix III, which lists products to which the IBC code does not apply.

Following a re-evaluation, products have been re-categorised into a new ‘3 plus 1’ category system with pollution categories X, Y, Z and other substances (OS). The changes will take effect from 1 January 2007.

The OS category holds only eight harmless products (apple juice, clay slurry, coal slurry, dextrose solution, glucose solution, kaoline slurry, molasses, and water).

Products defined as ‘floaters and persistent floaters’, which include vegetable oils, are assigned to category Y. Under the currently defined ship typing criteria, this means they will have to be carried in IMO Type 2 or 3 space.

A Type 1 ship is a chemical tanker intended for the transportation of products considered to present the greatest overall hazard. A Type 2 ship can transport products with appreciably severe environmental and safety hazards, which require significant preventive measures to prevent escape of such cargo. Usually this is a double-hull ship with a wide variety of tank sizes/capacities. A Type 3 ship is a chemical tanker intended to transport products with sufficiently severe environmental and safety hazards. These products require a moderate degree of containment to increase survival capability in a damaged condition.

Also after 1 January 2007, all ships loading IBC cargoes will need to hold a Certificate of Fitness (CoF) issued under the revised requirements.

The IMO agreed last year that the individually identified vegetable oils should in principle be carried in ship Type 2. But in response to fears by the vegetable-oil industry they came up with a compromise. Via regulation 4.1.3, carriage of these substances in a ship Type 3 might be allowed if the ship meets certain conditions.

New stripping requirements have also been introduced. Every ship constructed before 1 July 1986 shall be provided with a pumping and piping arrangement to ensure that each tank, certified for the carriage of substances in category X or Y, does not retain a quantity of residue in excess of 300 litres in the tank and its associated piping and that each tank certified for the carriage of substances in category Z does not retain a quantity of residue in excess of 900 litres.

Every ship constructed on or after 1 July 1986 but before 1 January 2007 shall be provided with a pumping and piping arrangement to ensure that each tank carrying substances in category X or Y does not retain residue in excess of 100 litres and that each tank certified for category Z substances does not have a residue in excess of 300 litres. Ships constructed after 1 January 2007 need to be provided with a pumping and piping arrangement to ensure that tanks certified for category X, Y or Z substances do not retain a residue in excess of 75 litres in the tank and its associated piping.

After 1 January 2007, stripping performance requirements will apply to all tankers holding a CoF. This will affect those chemical tankers currently carrying category D substances including caustic soda.

FREIGHT RATES ON THE RIGHT COURSE?

Chemical tanker freight rates have softened in recent weeks but not everyone is betting on them staying on the same course.

Freight rates, which on some Asian routes had hit an eight-year high earlier this year, have eased following a slowdown in chemical trade. For instance, the rate for a 2000-tonne easy chemical cargo was about US$30/tonne from South Korea to a main port in mid-China two months back. But space is now available in the low US$20s/tonne.

‘The market has gone fairly quiet over the last few months. But it must be remembered that freight rates are dropping from a high level. To some extent, the period starting from the second half of April to June is usually a slow time. The market at this time in 2004 was also very dead,’ says a shipowner.

He is, however, confident that the situation will not continue for the rest of the year. ‘The strong fundamentals are still in place. New chemical plants are coming up, there is not much new tonnage entering the market and bunker prices are still on the higher side. After the summer doldrums, the market will start feeling the heat in September and October,’ he adds.

Building new ships is becoming a problem as order books are full. The recent boom in the shipping industry has resulted in increased demand for newbuild/shipyard resources. And shipyards prefer to build something quick and easy rather than chemical tankers which require significant technology; they would rather do container ships, says a shipping industry source.

The shipowner complains: ‘Sometimes we cannot even get a quotation from shipyards. Right now, if you are looking to build a new ship there is not much that you can do until 2009.’

According to Clarkson Shipping Services, over the past five years annual net fleet growth was about 6%, but this is likely to be only 3% in the next five years. New deliveries of chemical tankers peaked in 2003. Demand for chemical tonnage rose by over 4%/year over the last ten years, and in the long term this average should be maintained, although activity in 2004 exceeded this level mainly because of strong Chinese economic growth. As with other markets, the future of chemical tanker freight rates depends on China’s economic growth and trade pattern.

But Clarkson also emphasises that the chemical tanker market cannot always be explained by a simple demand and supply graph. Other factors need to be kept in mind, such as changing International Maritime Organisation (IMO) regulations (see main story).

Then there are the self-imposed regulations, says the shipping industry source. ‘Suddenly a charterer might say that he cannot use ships older than 20 years.’ There is also the vetting process which is getting stricter. Charterers are quicker these days to reject ships that do not meet their standards.

A second shipping industry source believes the market is not likely to hit the bottom very soon. ‘Freight rates are unlikely to get much lower; the main factors are the strong demand and the changes in regulations proposed by the IMO.’

Reclassification of products in Marpol Annex II
Current pollution category* Proposed pollution category* Current ship type** Proposed ship type**
Phenol C Y 2 2
Phosphoric acid D Z 3 3
Caustic soda D Y 3 3
Sulphuric acid C Y 3 3
Benzene C Y 3 3
Toluene C Y 3 3
Cumene A Y 3 3
Acetic acid D Z 3 3
Methanol D Y na 3
Ethylene glycol D Y na 3
Xylenes C Y 3 2
Acrylonitrile B Y 2 2
MTBE D Z na 3
Urea ammonia nitrate (UAN) D Y na 2
Urea ammonia phosphate solution D Y na 2
Ethylene dichloride B Y 2 2
Source: Intertanko

* Marpol Annex II grades noxious liquid substances carried in bulk into four categories graded A to D, according to the hazard they present to marine resources, human health or amenities. The revisions adopted in October 2004 includes a new four category categorisation (X, Y, Z and other substances)

** Type 1 ship is a chemical tanker intended for the transportation of products considered to present the greatest overall hazard, and type 2 and type 3 are for products of progressively lesser hazard





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