Recovery will be delayed for chemical shipping

28 May 2012 00:00  [Source: ICB]

The Asia bulk chemical shipping industry will be challenging through 2012 because of stagnated freight rates, increased operating costs and oversupply of vessels amid a poor global economic outlook for petrochemicals.

Freight rates for prompt shipments of feedstock and specialty chemicals across key Asian routes in 2011 were largely stable to soft, triggered by a weak export market with no signs of recovery observed in the first quarter of 2012.

Changes in commodity trading patterns have altered the course of chemical shipping. The weak export market in 2011 rolled over into 2012, prompting shippers with a Contract of Affreightment (CoA) to leverage on contract shipping freights, hence leading to increased competition for prompt cargoes for chemical tanker operators without CoAs.


Pic credit: Rex Features

A CoA is a binding contract between the shipper and carrier to transport a large volume of a specific cargo over a period of time between agreed ports or regions at a fixed rate. "The demand from CoA charterers to date has been strong, and they are shipping more on CoA rates and shunning prompt shipment freights to minimize logistic costs," a Singapore-based shipbroker says.

The oversupply of vessels in Asia threatens freight recovery as orders for newly built chemical tankers prior to the 2008 global financial meltdown were delivered from 2010 and will continue through 2012. The spate of deliveries and slow demand for prompt shipments of petrochemicals are adding to the already well-supplied tonnage and will remain a barrier for the recovery of freight rates through 2012.

Freight rates for prompt shipments from the Middle East Gulf, a key exporter of chemicals to Asia have been declining steadily since the second quarter of 2011. Freights for shipping a 10,000 tonne cargo of easy chemicals from the Middle East Gulf to China Main Port (CMP) were last assessed at $50-51/tonne on April 27, down from a yearly high of $72/tonne in April 2011, according to ICIS data.

In addition, the frequent shutdowns at key petrochemical plants in the Middle East through 2011 because of poorer margins further weakened export markets, leading freight rates to drop further amid a lack of palm oil vessels from Southeast Asia.

A key correlation to prompt shipment freights from Middle East Gulf to Asia is palm oil freights from Southeast Asia to the west coast of India, Pakistan and Middle East regions.

Typically, chemical tanker operators load a full cargo of palm oil from Southeast Asian palm oil ports for discharge at the west coast of India and Pakistan. Thereafter, vessels are repositioned at the Middle East Gulf for CoA or prompt shipment to Asia or Europe.

"The weak palm oil freights from Southeast Asia to the west coast of India between January and March 2012 led to fewer vessels booked to the Middle East and India and Pakistan because of palm oil pricing economics," a leading Southeast Asian chemical/palm oil tanker operator says.

The tight availability for prompt vessels was largely driven by good demand for intra-Asia CoA shipments.

Chemical tanker operators were reluctant to book palm oil cargoes to India and Middle East regions because of a weak export market and charterers were unwilling to compensate operators' higher operating cost on freight.

"The freight rates for intra-Asia shipments were largely stable because of healthy demand from CoA charterers and spillovers in the event of vessel delays. Inquiries for prompt shipments were both from CoA charterers that still had requirements and from independent commodity traders," according to a Southeast Asia-based chemical tanker operator.

The prices of bunker fuel oil hovered above the $600/tonne del (delivered) ex-barge Singapore levels in 2011, but have since breached the $700/tonne del ex-barge Singapore mark in 2012 because of volatile crude and fuel oil prices.

The higher prices of marine-grade bunker fuel oil severely eroded the margins of chemical tanker operators for prompt shipments as they were unable to pass on the costs to their customers.

Bunker fuel is generally used for the propulsion of chemical tankers and its specifications differ from fuel oil used for other industrial purposes.

A shipowner may claim compensation for bunker from their CoA charterer under the terms of a CoA, where Bunker Adjustment Factor (BAF) is applicable and quantum is calculated in accordance to the terms of the contract.

Firmer marine-grade bunker prices and stagnant freight rates have resulted in poorer earnings for several chemical tanker operators, who have hence incurred higher debt positions.

As a result, mergers and divestments have taken place between companies to preserve shipping integrity and balance supply and demand of vessels.

Japan-based chemical tanker operator Dorval Kaiun formalized a joint venture with Chinese state-owned firmSinochem International, following its filing for bankruptcy protection in late 2011 to maintain their fleet and commitments to their customers.

Japan-based Nissho Shipping and Yuyo Steamship announced a consolidation in late March to form JX Shipping, a joint venture with a major stake owned by Japan's JX Nippon Oil & Energy.

Denmark-listed shipping company Nordic Tankers agreed to sell its chemical tanker shipping arm to private equity firm Triton Fund III after a period of continuing low freight rates and high debt position.

The outlook for shipbuilders remains weak through 2012 on the continued delivery of numerous chemical tankers into an already soft freight market. A price war is expected to ensue from the surplus in building capacity and freight revenue, piling on the challenges to ship financing for tanker operators.

Moreover, shipowners are facing problems in securing financing for orders that were placed earlier at prices above the current market. Chemical tanker operators will feel the squeeze on margins for putting up additional financing guarantees.

In addition to financing, the cost of safety is also being debated as a major issue as costs today are borne solely by the operators.

The MT Stolt Valor, which is a chemical tanker operated by Stolt Tankers, exploded on March 15 while transiting in the Persian Gulf after loading a cargo of methyl tertiary butyl ether (MTBE) and iso-butyl alcohol. The MT Kenos Athena, a South Korea-flagged vessel, sank off the coast of Shanwei city in southern China on March 14 after loading a full cargo of sulfuric acid from South Korea.

The MT Royal Diamond 7 caught fire following an explosion that occurred at the vessel's deck after unloading a 2,000 tonne cargo of toluene, a highly flammable chemical, after berthing at Mumbai port on March 19.

"Safety remains a top priority for vessel owners and we will spare no expense to ensure the safety of the seafares and transportation of the goods. However, such costs cannot be passed onto the charterers as they are under the jurisdiction of the shipowner and manager," says a Southeast Asia-based shipowner.

Weighing on freight recovery from the Middle East Gulf to Asia are economic factors. Chemical tanker operators are now shunning Iran because of the US-led sanctions for imports and exports, and this has led to increased competition for prompt shipments from the Arabian Gulf. "The number of chemical tankers that can call at Iranian ports is limited because of the embargo and only a handful of Chinese, Russian and Indian tankers are still calling in Iran. However, it may not last long because of Protection & Insurance [PnI] coverage," says a Singapore-based shipbroker.

In late January, the Japanese shipowners' mutual PnI club announced that members who failed to renew PnI coverage by January 23 would have their coverage limited to below the minimum required coverage of $1bn.

"The Iran sanction is posing a problem for shipments of feedstock chemicals from Iran to Northeast Asia. Premiums are paid on freight, but there are very few takers because the PnI clubs are linked to the US and Europe," a vessel charterer argues.

Competition will be stiff for prompt shipments from the Arabian Gulf in the second half of 2012 because of the Iran sanctions. Chemical tanker operators are aggressively securing COA backhaul cargoes from the Middle East back to Asia to cover operating costs amid a weak export market.

"We are not talking about profitability but the key is to minimize operating losses while keeping our vessels gainfully employed until recovery is in sight," a leading southeast Asia-based chemical tanker operator said.

"This year will be a challenging one for the shipping industry and [the previous] projected recovery of chemical freight in 2013 may be extended to 2014 depending on the global economy," says one shipbroker.

This is an update of an article that first appeared in the APIC 2012 Supplement prepared by The Chemical Daily and ICIS on behalf of this year's APIC organizer Malaysian Petrochemical Association (MPA).

By: Lester Teo

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