In his first column of the year for Splash, renowned ship financier Dagfinn Lunde selected pure chemical carriers as a surprise pick for a ship investment this year. Does the sector really have a chance of providing strong returns in 2018? Chief correspondent Jason Jiang investigates.
The chemical tanker market had been in the doldrums in the past few years with overcapacity seen as one of the major issues causing the recession.
In January, the eye-catching news that Chinese chemical tanker owner Dingheng Shipping laid out a plan to develop a fleet of 100 chemical tankers raised more questions about the outlook of the sector.
Is the worst over for the pure chemical tanker fleet in this cycle and is actually now the time to start buying them?
Many industry analysts contacted by Splash hold the view that the darkest time for the chemical tanker is about to be over and the dawn can be expected as soon as in early 2019.
According to shipping consultancy Drewry’s latest Chemical Forecaster report, the global chemical trade grew by a little over 4% in 2017, while overall tonne-mile demand expanded by almost 5%. Despite continuing global economic growth, Drewry expects seaborne chemical trade to grow by 2.5% in 2018 and tonne-mile demand by 1.6%, reflecting a slowdown in long-haul trip growth. Drewry believes the increasing self-sufficiency in base chemicals in Asian countries is a definite threat to long-haul trades, and although scrapping will continue to play a vital role and will increase until 2020 when the new Ballast Water Treatment System and the sulphur cap regulations come into effect, it will not be sufficient to offset new deliveries and Drewry forecasts that the fleet is likely to grow by an annual rate of around 3% this year and next year.
“We expect freight rates to remain stable in 2018 on major regional routes, but they will be depressed on traditional long-haul routes because of oversupply of large vessels,” says Hu Qing, Drewry’s lead analyst for chemical shipping.
“We forecast oversupply in the chemical sector in 2018. The fleet trading in chemicals has expanded more than demand and will continue to so in 2018. Apart from the fact that deliveries of new ships will outpace scrapping, it is also the case that the average size of the new vessels scheduled for delivery are larger than the vessels they are replacing. We therefore expect time charter rates to come under increasing pressure,” Hu adds.
“Our outlook for the first half of 2018 remains essentially unchanged. We do not anticipate any substantial improvement in the chemical tanker market until 2019 when the orderbook reduces and the supply/demand balance improves,” Niels Stolt-Nielsen, chief executive officer of Stolt-Nielsen said, when the company released its annual results in February.
VesselsValue analyst Court Smith reckons the chemical tanker markets have underperformed.
According to Smith, currently a 19,500 dwt Japanese built ten-year-old stainless tanker with 14 tanks is trading below its median level from 1992 to the present, however, lower asset values were reported in the market from 2010 to 2014, indicating there may be some downside left, but it is not significant.
“The main question facing market participants is when earnings will turn the corner,” Smith says.
“The MR tanker markets appear to be improving, but earnings need to see a sustained rise to pull chemical capable handysize and larger ships out of chemicals service. The shift in ships between the clean and chemical tanker markets can lead to sudden swings up or down in rates, particularly in the smaller chemical tanker segment. If MR earnings continue firming as expected over 2018 the number of ships trading in the chemical space could contract, pushing up returns there as well,” Smith maintains, adding that the outstanding orderbook remains a concern though, the amount of tonnage set to be delivered is increasing this year before moderating through 2020, while few ships are scheduled to come off the water during the same period.
“At risk of being repetitive, we would continue to urge ship owners who are considering expanding their fleets, to look hard at buying existing ships, or those already on order, and to avoid placing new orders. With an average age of less than 11 years, and an average life span of 20 to 25 years, minimum, any new orders can only delay any significant upturn in the overall market situation,” says Captain Ken Tree, managing director at tanker consultancy specialist KTR Maritime Consultants.
According to Stuart Nicoll, director at Maritime Strategies International (MSI), the chemical tanker market is at rock bottom, with time charters rates for 20,000 dwt dwt stainless steel vessels settling at the lowest level for five years and the key question is the pace and scale of recovery in the coming years.
Nicoll reckons fleet growth is easing and assuming no significant resurgence in newbuilding activity in the near term, which is unlikely to come from top tier western operators, while supply should be further tempered by increased scrapping due to the ballast water and sulphur regulations coming in 2019/20.
“With the supply-side seemingly benign, the recovery dynamics shift to the volume and structure of chemical trade. For the specialty chemicals, the general strength of the global economy and a relatively buoyant chemical industry represent key positives. However, the sophisticated end of the chemical tanker sector still depends heavily on trends in commodity chemicals and even Clean Petroleum Products (CPP) markets,” Nicoll says.
MSI anticipates a recovery in CPP rates from next year, partly based on both supply and demand dynamics associated with the 2020 sulphur cap. The positives for the commodity chemicals sector come from the reinvigoration of the US chemical industry, due to its access to cheap shale gas, while downsides can be found in a move to greater self-sufficiency in China and further vertical integration in the Middle East by way of ‘oil-to-chemical’ plants such as Sadara in Saudi Arabia.
“Near-term recovery in rates may be sluggish, but by 2020/21 we see a steady improvement in earnings and values. This suggests today is a good time for acquisition, especially of second-hand tonnage,” says Nicoll.
For newbuildings, Nicoll reckons the picture is more complex.
“It is certainly true that the smaller, regional vessels (sub 15,000 dwt) are seriously underbuilt, as owners struggle with low earnings to justify investment. However, with newbuilding prices and earnings likely to rise even in these segments in the coming years, a bold investment in the small segments today could just pay off,” Nicoll concludes.