Wrong Assumptions Drive Shipping, C2 Investments

Business, China, Company Strategy, Economics, Markets, Olefins, Polyolefins, Projects

The goat has been got 

goat-ears.jpg 

Source of picture: michaelscomments.wordpress.com

 

By John Richardson

EARLIER this week we blogged on the 25 or so ethylene carriers that could be delivered into the shipping market by 2013 and the risk this poses to freight rates.

Thanks to one of our readers, Mark Mirosevic-Sorgo – managing director of Singapore-based shipping broker Braemar Quincannon – for pointing out that the semi-refrigerated C2s shipping market, while suffering from a fine balancing point, has successfully absorbed speculative new capacity before.

He also stressed, in his comment on the post, that these ships have the flexibility to carry cargoes such as liquefied petroleum gas (LPG), ammonia and vinyl chloride monomer (VCM) – creating the potential for all this extra tonnage to be absorbed across several markets.

But whatever the impact on freight rates, the new-vessel orders point to a very worrying underlying issue, according to a petrochemicals industry source.

“Industry observers are going round saying that profitability in the ethylene chain will be back to peak levels by 2015, based on a global GDP ((gross domestic product) growth forecast of 3.8% per year,” he said.

“This seems far too high, but the real issue is that part of their argument for record profitability is that some people will shut crackers down in the interim – but this is an oxymoron, as why would people shut down, if record profitability is forecast?

“Equally, forecasts of record profitability suggest to the great unwashed that more ethylene capacity will be needed and hence more shipping.

“They don’t understand that there is no link between ethylene capacity changes and shipping as people always try to integrate supply/demand so they can instead move the derivatives.

“The observers are obviously not saying this, but their assumptions go everywhere, and people are simply drawing what seems to them to be an obvious, though spurious, conclusion. “

Somebody clearly got this bloke’s goat, and I think, by the sound of it, for a very good reason.

But if it is fund managers awash with money to invest who have ordered these ships, (as we again said in the original post) the odd $40m down the proverbial sink isn’t going to make much difference to their bonuses.

There is also a chance that these particular gambles among many might pay off – especially if, as Mark said, the extra tonnage ends up being comfortably spread across several chemicals.

More importantly for the main industry that this blog covers – petrochemicals in case you haven’t already guessed – the industry source’s comments point to the danger of new crackers being built before the market is ready.

Nothing new there then…..

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