Thursday 22 December 2011

Chem-tanker Consolidation Gathers Pace

Consolidation is seen by some as the silver bullet to carry financially stretched shipping companies through tough markets.

Tougher times are creating fresh impetus for a shake-up in the chemicals sector.

The tanker sector is viewed by some as in most distress with Frontline, General Maritime Corp (Genmar) and Torm grabbing the headlines.

But consolidation is also now being widely talked about as the most likely panacea for container shipping and other markets.

Collaboration between CMA CGM and Mediterranean Shipping Co (MSC), the creation of Germany’s largest fleet capacity-wise with the pending Erck Rickmers-Komrowski merger and Peter Dohle taking a sizeable stake in Ernst Russ are all symptomatic of the fragile state of shipping.

Some, like Dohle and Rickmers, see their relative stability as an opportunity to grow, while others believe strength in numbers is the key to safeguarding their future.

One sector where consolidation began some time ago but has not received the same exposure is the chemical-tanker market. Being very much a barometer of the world economy, its fortunes are as much as any other shipping sector closely tied to gross domestic product (GDP).

For example, Germany’s John T Essberger has already taken over Heinrich Schoeller’s United Chemical Transport (UCT) and Denmark’s Erria has merged with compatriot Uni-Tankers.

UK-based private-equity group Triton has swallowed Jutland-based HerningShipping and is open about its ambitions to further consolidate the sector if the right opportunities arise.

The gravity of the situation in the chemical market has been driven home by Eitzen Chemical withdrawing from its pool activities to preserve cash and Japanese parcel-tanker owner and operator Dorval Kaiun recently filing for court protection.

Last month, Copenhagen-based Nordic Tankers — which says it wants to act as a market consolidator — left no doubt that much of 2011 has not been a good yearfor chemical tankers.

Chief executive Tommy Thomsen stated in the company’s third-quarter report that the segment was no different from that of products tankers and large tankers (where Nordic Tankers is not a player) in being unprofitable, with very littleactivity and consequently historically low freight rates.

Since then things have improved but for how long? Fears that leading economies are heading into recession again is a shadow hanging over the industry.

Certainly, long-haul voyages from Houston to the Far East have been rising due totight tonnage supply and firm Asian demand. Shipbroker Clarksons reported recently that rates for a 10,000-tonne parcel on the route were, at $118 pertonne, a 38% improvement on the November average.

This has had a knock-on effect, with a 5,000-tonne parcel from Rotterdam to the Far East ahead $28 in just a week to $115 per tonne.“With many owners now involved in long-haul voyages, the tonnage-supply situation could mean a very merry Christmas for owners still looking to fix cargoesin the Atlantic,” said the broker.

But to put in perspective a report by Bloomberg that chemical tankers may earn more in 2012 than for several years, the fact is earnings have hardly been anything to shout about in recent times, even for big players like Stolt-Nielsen whose chief executive Niels Stolt-Nielsen as recently as October was talking about no significant improvement in the parcel-tanker market before 2013.

Asked about the more recently improved market to the Far East, initially from Houston and subsequently drawing in Rotterdam, one analyst cautioned against getting carried away.“Longer term, chemical trades are dependent on world industrial production,” he said, adding that the sector’s fortunes hinge on whether the world falls back into recession.

One owner/operator describes conditions as still “very difficult” and this has been reflected in the collapse of Dorval.“I don’t think I have seen a market as tough as this before and that comes from 30 years of experience,” he said. “That is why it is a good time to consolidate."

“In general, you will find all industrial players are open to discussion about consolidation but that is typical in times of tough markets.

“You only have to look to other shipping segments to see that happening. Take the Maersk VLCC pool, which is one way of consolidating.”

He describes chemicals as a “complicated” sector where a strong industrial player “can make a difference.”

Certainly, there are close relationships between owners and chemical companies, with the market dominated by contracts of affreightment (COAs). A lot of cargoes are arranged on a long-term basis and owners tell TradeWinds that it isencouraging customers are recognising that as COA renewals for 2012 come upfor renewal they must reflect the increase in spot-market activity.

One challenge facing the industry is the number of tankers able to swing between chemicals and products. Many medium-range (MR) tankers have been built in the last few years that are also able to take IMO II cargoes because the yards were willing to do so for just a couple of million dollars more.

According to Clarksons, there are still 277 IMO II tankers to be delivered out of a total chemical-tanker orderbook of 365 vessels.

Early 2007 saw regulatory chemical-classification changes trigger the ordering of many IMO II vessels as owners anticipated steady and strong demand from Asia.

Many newbuildings, however, were delivered ahead of chemical production capacity coming on stream, as well as coinciding with weak demand, which depressed the market through 2010.

On the plus side, owners have been more conservative than some of their peers, particularly bulker owners who, despite already having a massive orderbook, wenton another orders spree to “celebrate” a temporary pick-up in the market a year or so ago, comments one cycnical broker.

He says the chemical sector is currently better positioned in terms of tonnage overhang but another recession in 2012 could easily create another oversupply situation.