For Odfjell, US shale to drive sea change for chem-tankers

The demand fundamentals for chemical tankers look good to Odfjell chief executive Kristian Morch.

Along with rising oil prices, part of this is down to the much-debated effect of US shale gas — which Morch says is in the process of transforming the face of the whole chemical sector by increasing tonne-miles.

Rising oil prices are an obvious double-edged sword. They can dramatically push up fuel costs for shipowners but rising prices mean vessel clients are also keen to produce oil-related products, such as chemicals, Morch tells TradeWinds.

For Norway's Odfjell and its fleet of 77 chemical tankers, roughly 60% of its business is covered one year ahead by contracts with clients but these contracts also contain bunker adjustment clauses.

This takes the pain out of big swings in the price of fuel. As of the third quarter, the Bergen-based company's financial hedging of bunker costs was done at $230 per tonne.

However, the other edge of the oil-price sword is chemical tanker demand.

“If you look at the oil price and the oil-related industries, then a higher oil price is a good thing normally because the industry will be producing as much as they can. From an overall demand for transportation perspective, it is normally a good sign,” Morch says.

He reiterates Odfjell’s belief that the chemical markets will turn further in owners’ favour this year, although he declines to pinpoint any time.

“I think it would be a mistake to be always optimistic. You would be right only half the time. That is a danger because I think too many people have been overly optimistic in the past and this has led to a lot of ships that should never have been built,” he says.

“That being said, I think demand for chemical transportation, if you look at the market consensus, will grow somewhere between 3% and 4% this year. And that’s faster than fundamental oil demand and probably growing faster than industrial production.”

Morch says the reason chemical demand is growing faster than oil demand is the increasing distances that chemicals are travelling.

“The really big thing that a lot of people are missing is the shale gas in the US and the effect that has on chemical production,” he says.

“Now I am oversimplifying but in the old days many countries would import crude oil, they would crack it, they would get naptha, they would crack that and then they would have their own chemical production.

“Look at the economics of doing that, against the benefit that the US chemical producers have, because they now actually have the cheapest chemical feedstock in the world because of shale gas.”

For example, being able to sell natural gas-based ethylene, as opposed to the more expensive naptha-based ethylene, gives US producers a large advantage, while domestic production capacity has far outpaced the needs of ethylene consumption in the US, according to Platts.

For Odfjell, US shale to drive sea change for chem-tankers

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The economics “make a lot sense” for producing chemicals in the US, and also in the Middle East, and then transporting them over much longer distances, Morch says.

“That is actually something that is really changing the way our industry in the chemical space is working,” he says, pointing to growing concentration of production in large hubs in the US and Middle East.

Figures by maritime consultancy Drewry back this up. In its last sector outlook at the end of last year, it estimated nearly a 4% year-on-year growth tonne-mile demand for chemicals for 2017.

Drewry also said lower vessel ordering and a narrowing of the supply-demand gap will help a market recovery for chemical tankers in 2018, calling the market “oversupplied”.

However, Morch disagrees with the use of that particular word. He describes the markets in the third quarter as “difficult” and expects the challenges to continue into the fourth quarter, although with some improvements in some spot markets.

“The question about oversupply is an interesting one, because for many years we’ve heard about a structurally oversupplied market. But personally, I have difficulty in seeing it as oversupplied when all the ships are moving and you don’t have ships anchored anywhere,” Morch says.

“I understand the points about slow steaming and inefficiencies and so on but the fact of the matter is that the fleet is employed.

“It is true that in the past couple of years, supply growth has outpaced demand but from now on you will see the opposite. That’s why we see an improvement sometime during 2018 but for chemical tankers we don’t see a too bad balance in terms of supply and demand.”

Odfjell's 27 chartered-in chemical tankers

Source: Odfjell