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Analyst Abstract

Dry Bulk

Amid a gloomy year for dry bulk overall, one bright spot has been China’s imports of soybeans, which have exceeded all expectations and helped prop up earnings for mid-sized vessels.

This year, China looks set to import around 100m tons of soybeans, and next year imports could be just as high, or even increased, analysts at Lorentzen & Stemoco suggested.

China accounts for 65% of the world’s soybeans trade and processes over 80% of its imported soybeans into animal feed.

US shipments of soybeans have picked up to pre-trade war levels. Detailed cargo tracking data by grain type is still is still patchy for October, but United States Department of Agriculture (USDA) inspection figures indicate a 75% year-on-year jump in shipments, mostly heading to China.

“The Chinese pig industry’s recovery from the Swine Flu outbreak has driven greater consolidation of farming activity. This industrialisation tends to drive greater use of processed grain for animal feed, and has helped to push demand for imported grains to new highs this year,” Braemar ACM reported in a recent note to clients.

The USDA projects soybean shipments over the 2020/21 marketing year, which runs September to August, to reach almost 60m tonnes, a 31% increase on the previous year. Braemar ACM expects volumes over November to December to come in 25% higher year-on-year, while Q1 2021 is expected to be 38% stronger than Q1 of this year.

US shipments of corn, which seasonally peak in Q2, have also had a relatively strong year so far. Corn shipments reached nearly 40m tonnes over January to September this year, according to the USDA, marking a 16% year-on-year increase. But new patterns which are emerging are set to boost exports further.

China tends to import relatively small amounts of corn, but in the past few weeks there’s been a significant uptick in cargo arrivals. The heavy rains and flooding and flooding earlier in the year hit Chinese corn output, leading to a draw down in stockpiles in the country. With food security and food inflation key concerns for Beijing, imports have ramped up. Soaring soybean prices have also encouraged farmers to look to other sources of feed, such as corn and wheat.

Chinese corn receipts on bulk carriers totalled 1.2m tonnes in October, the highest monthly volume since 2016 and the highest on record for this time of the year. But what is unusual about October’s imports is that they were sourced almost exclusively from the US.

“An outlook for increased Chinese seaborne corn appetite will likely boost prospects for long-haul voyages, especially from the US Gulf and Pacific Northwest as well as the Black Sea,” SSY noted in a recent report.

Tankers

In the tanker sector the most striking trend of Covid-19 has been on the refining industry which has already seen the closure of a tranche of mature, inefficient crude processing capacity. Meanwhile, the expansion of refining capacity East of Suez shows no sign of slowing considering that two mega plants will start up before the end of 2020.

The Covid crisis has hastened a seismic shift in the global refining industry as demand for plastics and fuels grows in China and the rest of Asia.

According to data from the International Energy Agency, for the first time since the start of the modern oil age in 1859, the US will lose its crown as the world’s largest petroleum refiner. China is set to become number one as early as next year, while India over the weekend announced plans to double its oil refining capacity in the next five years.

Refiners are suffering as margins remain at extremely low levels, hence they’ve been curbing throughputs this year. Several refiners have shut individual units or whole plants with their long-term viability now extremely uncertain.

Alphatanker has identified 0.78 mb/d of refining capacity which will be shuttered by the end of this year and 0.55 mb/d of capacity which will be shuttered at some point in 2021. Alphatanker considers this to be the tip of the iceberg. Notably, the research outfit has so far only identified around 290,000 barrels per day of European refining capacity which will be shuttered and yet Alphatanker classifes 6m barrels per day of European refining capacity as under threat and projects that 1.5m barrels per day of capacity should be closed to bring European refinery utilisation towards that of other regions.

The two regions which have seen the most rationalisation confirmed so far are Asia and the US. Elsewhere the spotlight has fallen on Australia with the future of its four refineries shrouded in uncertainty.

Next month is expected to see the commissioning of two new 400,000 barrels per day mega refineries; Saudi Aramco’s much delayed Jizan plant and the second phase of Zhejiang Petroleum & Chemical’s project in China.

All told, and together with start-ups elsewhere in China, the Philippines, the US and India Alphatanker estimates that 1.3m barrels per day of global crude processing capacity will be commissioned by end-2020. Furthermore, when accounting for closures, global capacity will expand by a net 525,000 barrels per day with a net 340,000 barrels per day expansion forecast for next year.

Remarkably, next year will see 94% of new capacity being located East of Suez which comes on top of 98% this year. Looking towards 2025, 80% of new capacity will be located East of Suez with only two major projects expected to be delivered in the western hemisphere – one in the US and the other in Nigeria.

The expectation is that more refineries in mature markets will close or convert to import terminals, especially less sophisticated facilities with no integration with petrochemicals.

Over the longer term analysts at Potent & Partners suggest this could mean that refining capacity will be concentrated worldwide in regional hubs such as Singapore, South Korea, China, India and the Middle East, in addition to the traditional western refining centers in Europe and the US Gulf.

“Refined products will move in larger quantities over longer distances,” Poten predicts, pointing out how the tanker sector has already seen that happening to some degree with newbuilding suezmaxes and VLCCs moving product from Asia into the Atlantic Basin.

“This can develop into a hub and spoke model, where large, coated tankers (LR2, LR3) deliver crude into distribution hubs and smaller tankers will distribute the products to end-users,” Poten suggested.

Containers

Once again the authorities were busy this month scrutinising the profits of liners, especially on the booming transpacific tradelane. Liner executives were summoned to Seoul and Beijing while the Federal Maritime Commission in Washington also entered the fray.

While lines have been accused of profiteering, especially on the transpacific, the argument that they have squeezed capacity to push rates up does not hold true as the year draws to an end. Data published by Sea-Intelligence shows liners are on track to increase capacity year-on-year on the transpacific by 23.4% in November and by 27.3% in December.

On Asia-Europe however, the carriers’ deployment plans indicate a capacity growth of 6.7% year-on-year in December, but it is lower than in November, and in the longer historical context, is not an exceptional increase. Plenty of ships have been rerouted to the far more profitable transpacific in recent months.

“If we are now poised to see a similar boom in demand on Asia-Europe, shippers on that trade are about to experience very tight capacity and sharply increasing rates in the coming weeks,” Sea-Intelligence warned.

The rates surge has been seen on most tradelanes around the world in recent weeks, with equipment stretched amid rampant demand, frustrating many shippers.

According to Drewry Maritime Research, “The current state of the container market is one of dysfunction, bordering on chaos. Supply chains have been stretched to near breaking point by the unprecedented volatility in demand swings, the tell being numerous port congestion notices popping up in all continents, from Sydney to Felixstowe and many places in between.”

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