Limited new export-oriented global chems capacity growth expected to 2022 – Odfjell

LONDON (ICIS)–Limited new investment in export-oriented chemicals capacity is expected through to 2022 as a result of margin pressure from new supply coming onstream over the last few years add economic uncertainty after the pandemic, the Norwegian chemicals logistics and transport major Odfjell said on Tuesday.

Significant new capacity investments in the US and Middle East had contributed to strong shipping sector capacity demand, but depressed economic growth in 2019 has dampened investment appetite as players deal with margin pressure on the back of that supply growth.

Oversupply and uncertainty about the pace of recovery as a result of the pandemic is likely to limit new capacity investment over the next few years, according to Bjorn Kristian Roed, head of investor relations and research at Odfjell.

Markets absorbing substantial new capacities in a period of economic turmoil is likely to cut into the strong mile-tonne demand – a shipping industry metric measuring volume of freight and distance transported – after strong levels in recent years.

DEMAND TO GROW DURING THE CRISIS, BUT SLOWER
As with the global financial meltdown of 2008-9, chemicals shipping demand growth is not likely to contract during crisis, but the company has lowered its forecast to an extent, according to CEO Kristian Morch.

“If you look at the demand picture in 2008-09, I think what surprised a lot of people is that demand continued to grow throughout the last crisis, as [compound annual growth rate] 3% year,” he said, speaking at the firm’s capital markets day in Bergen.

“What happened in 2009 was never a demand crisis. The 2019 crisis was also structural crisis where what we’re looking at with Covid 19 is a pandemic with voluntary shutdowns, which leads to unemployment and probably one of the biggest dips in the global economy,” he said

“But for shipping, in the data we’re looking at demand does not contract, that is not the picture we’re seeing now,” he added.

At present the company sees a negative impact on 28% of seaborne trade from slower demand on the back of the crisis, particularly around the global construction and automotive sectors, according to Roed.

Around half of chemicals products currently have neutral to positive effects, due to demand from the food and agriculture, packaging and pharmaceutical sectors , he added.

STRONGER Q2
The company is expecting its financial second quarter to be stronger than the first. It posted a net loss of $4.5m for the first three months of the year, representing its strongest quarter in several years, according to Morch.

“We have a had a good start to the year,” he said. “Q1 this year was the best quarter we have had since 2017 and … we believe that the second quarter will be stronger than the first.”

The company has high ship and terminal utilisation rates, with cost-cutting measures in recent years leaving it in a stronger position.

Weak global economic growth in the run-up to the pandemic meant that new ship supply is expected to be much lower than at the time of the financial crisis, at around 1.4% this year and 0.5% next year, compared to 14-15% in 2008-9, meaning that the shipping sector is much less exposed to a glut of new vessels.

“We believe there are good arguments that what you saw in 2009 was a supply-driven crisis,” Morch said.

COST-CUTTING, EXPANSIONS
The company has zero future capital expenditure scheduled for the shipping side of its business, while the main capital project for its terminals arm is the expansion of its Houston, Texas, hub. The company is working on a $1.8m-2.5m project to bring three tanks back into service at the site for 2019-20, and to expand storage capacity in 2021-22 with a $23m-25m investment,

Odfjell is also considering a much larger expansion at the site, which would increase storage capacity by 150,000-165,000 cubic metres compared to 30,000-35,000 cbm for the 2-021-22 works.

With an estimated cost of $88m-113m, the company is looking to secure an anchor client for the new capacity before making a final investment decision on the larger works.

The company also has a bond maturing in January 2021, and is looking to secure a new liquidity facility to finance it, due to current unfavourable conditions in the capital markets, according to CFO Terje Iversen.

“The bond market right now is more or less closed, especially if you want to do that at decent terms… we have initiated a plan to take care of that maturity without going to the bond market and having to pay the prices that are offered today,” he said.

Reducing debt levels and lowering Odfjell’s breakeven point are also priorities, with shares currently trading at a significant discount to underlying value, according to Iversen.

“It’s a challenge for us and makes it very difficult for us to use our shares as currency,” he added.

Front page picture: Odfjell’s terminal in Charleston, US
Source: Odfjell

Focus article by Tom Brown