23-12-2016

Pivot points Asia: Clean tanker market pressured

Tanker

The east-of-Suez market for long-range (LR) clean product tankers may remain under pressure in 2017 following a tough last 12 months, on rising tonnage and a slowdown in naphtha flows to Asia-Pacific.

Freight rates for LR tankers have declined this year, with earnings for 55,000t LR1 vessels falling from $27,000/d at the end of 2015 to as low as $4,196/d on 29 November, before rebounding to $11,636/d as of today. And rates for bigger, 75,000t LR2 vessels have been hit even harder, dropping from a time charter equivalent (TCE) of $34,200/d to $16,830/d over the same period. LR2 rates slumped to a low of $1,672/d on 28 September.

The recent recovery in rates means current LR earnings are sufficient to cover the operating cost of a LR1 vessel, which is estimated at $7,500/d. Operating costs for the bigger LR2 carriers are about $9,000/d. But shipbrokers are sceptical that the year-end rally will continue into 2017.

More LR tankers are likely to hit the market next year. Shipowners are expected to take delivery of 53 LR2 and 24 LR1 vessels next year, up from 37 and 19 respectively in 2016, according to estimates from an international shipbroker. The extra tonnage available in the market is likely to weigh on freight rates, unless cargo volumes increase.

But some vessels are being drawn into the dirty cargo trade, with more attractive earnings of $25,637/d in southeast Asia encouraging some LR tankers to make the switch. The higher earnings have prompted around 34 LR2 tankers to move into the regional dirty product market since January, although this has been partly offset by around 11 such vessels switching from dirty to clean cargoes in the period, a regional analyst said earlier this month. About 8 LR2 vessels joined the dirty market in November alone.

Naphtha accounts for easily the largest volumes of clean product shipped from the Mideast Gulf to Asia. But naphtha flows on this route have slowed in recent months, amid shutdowns and the uneven start-up of new refinery capacity in the Middle East. And largely unattractive arbitrage economics to ship naphtha from Europe to Asia-Pacific have also dampened demand for LR tankers on this route in 2016.

Asia-Pacific product imports have come under pressure from rising domestic oil product prices, keeping demand for LR tankers sluggish and depressing freight rates, says Rajesh Verma, lead tanker shipping analyst at consultancy Drewry.

Asian demand for naphtha imports could also face headwinds in the coming years because of rising production within the region and the use of alternative petrochemical feedstocks. Growing global condensate supplies have encouraged Asia-Pacific refiners and petrochemical producers to build condensate splitters that will enable them to produce more naphtha. Taiwan’s state-controlled CPC is due to start a new 50,000 b/d condensate splitter early in 2017, adding to facilities that have come on line in South Korea this year.

The use of LPG in regional crackers is also gaining popularity on the back of falling prices of propane, which provides a higher yield of some petrochemical products compared to alternative feedstock naphtha. Propane can be used to directly replace naphtha in crackers, up to a limit — typically around 10-15pc — defined partly by technical and logistical factors. Japanese refiners Idemitsu Kosan and Mitsui are planning to increase propane cracking capacity at their 920,000 t/yr ethylene plant in Chiba. The potential for a sharp rise in US supplies of natural gas liquids (NGLs) to Asia-Pacific, thanks to the development of the country’s extensive shale resources, is also threatening to take market share from naphtha.

The use of ethane is making some headway in Asia, although it can only be used in some crackers and requires the use of special tankers. India’s private-sector Reliance Industries (RIL), one of the world’s largest petrochemicals producers, has taken delivery of two very large ethane carriers (VLECs) to transport ethane from the US Gulf coast to Sikka on India’s west coast. It loaded its first VLEC on 11 December. RIL plans to take delivery of another four such vessels.

Naphtha-based crackers still far outnumber those using NGLs in Asia-Pacific. But the emergence of the US as a significant liquids exporter suggests the market penetration of NGLs will continue to increase, particularly if President-elect Donald Trump follows through on his pledges to roll back the Obama administration’s oil and gas regulations.

Bright spots could emerge for vessel operators. Any correction in naphtha prices will lift demand for the product and could lead to an increase in shipments to Asia-Pacific. And LR tanker owners continue to look for alternative routes and shipments of other products, particularly given the prospect of the Trump administration’s policies leading to a shift in global trade flows.

Source: Argus

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