Anomaly On One Route Changes Spot Market Outlook
Wednesday, August 21, 2013

Drewry’s latest Chemical Forecaster reports an odd occurrence in the spot market. It would have been another dull quarter in terms of the spot market but for the irrational trend on the Transpacific Westbound, which was uncharacteristically busy. A decline in Chinese economic growth clearly indicates that the spurt cannot be attributed to end-user demand, so the sudden surge in the second quarter was attributable to a widening arbitrage spread between U.S. and Asian prices.

The key chemicals were styrene and paraxylene. The greater tonne-mile demand on this trade had a positive effect of absorbing tonnage into this route. Freight rates on the Atlantic benefited from the absorption of vessels on the Transpacific Westbound towards the end of the quarter. The cyclicality of the freight market points to a hike in freight rates in the last quarter on this route. If the momentum gained in the second quarter is sustained on this route then the surge in the second quarter might not have been an anomaly and would signify the point when the market turned around. But we do not expect a complete turnaround in the sector before 2015.

Another aspect of note this quarter was the mismatch between spot, which was low, and contracts signed this quarter, which were healthy. More owners are now depending on time charters to bolster their earnings and stay solvent. The primary reason that owners negotiated hard for period contracts was that operating costs are at a historic high, although a lowering of bunker prices this quarter helped improve earnings. However, owners will continue battling challenging conditions on account of the overall global economic outlook. Consolidation of tonnage is beneficial for the sector and news about the formation of a pool between Jo Tankers and Tokyo Marine, which will trade under the name of Milestone Chemical Tankers, is a further indicator of the policies adopted by boards to tide them over the poor market conditions. Subject to anti-trust approval from the EU and U.S., the pool will consist of 62 vessels: 52 from Tokyo Marine and 11 from Jo Tankers.

Owners remain under duress as operating costs remain at a historic high, which clearly is a strong inducement for owners to seek freight increases. This financial year will remain very challenging for owners, who will have to rely on the support of banks to tide them through the year.

Drewry’s latest Chemical Forecaster includes a special section on Shale Gas and Chemical Tanker Dynamics.  His chapter contains a range of information and analysis on the impact of Shale on petrochemical industry. It also discussed the outlook for the industry in the near term as well as analyzing the key operators servicing the growing Transpacific Westbound shipping route

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