The Chemical Carrier Market in 2003
 

The freight market
The fleet

The year 2003 was quite contrasted with freight rate increases at the beginning and at the end of the period, but in general and for all players in the chemical carrier market, 2003 can be classified as morose.

Considerable uncertainties persist for both owners as well as producers. The industry awaits a marked recovery in economic activity from the US and especially Europe. Only China with a growth that regularly exceeds expectations is in the limelight. Consequently the financial situation of petrochemical companies as well as shipowners is in a highly precarious, if not catastrophic, state at the end of the year.

The increase in oil prices and refined products has a heavy impact on production costs as well as transport costs, which with the weakness of the dollar compared to the euro, results in European companies being less competitive on export markets.

These last years have seen the formation of owners' pools or co-operative agreements on certain routes, but the poor results being experienced are putting into question the whole structure of these pools. Some owners voice a divergence in aims and policies between partners, but the fact remains that over recent years the market has settled down to such low levels that it is not enough to cover shipping costs.

Contracts of affreightment, which are the basic employment of chemical carriers, have been renewed these past years at far too low rates and owners have had an awful time trying to optimise these contracts, which have become unprofitable.

At the beginning of the year we saw the break-up of the Novamar pool between Marnavi and Finaval, then unexpectedly the withdrawal of Ahrenkiel and Schoeller within the U.C.T. pool, who then respectively formed new pools, one with Odfjell and the other with Seatrans. These upheavals in the European market were followed by Anders Utkilens Rederei taking a controlling interest in Chemtrans. Finally in a different context, John T. Essberger bought out its partner Vopak, whose parent company Brostr'm was looking to reduce its involvement in shipping.
 

From the start of the year and on all European movements, spot rates have been on the rise over the first two quarters. Such a trend has not been seen for a good number of years, as normally the market remained steady with slight ups and downs over short periods. This resurgence came to a halt in June and rates fell back to their levels at the end of 2002.

The market in North Europe therefore kept at a reasonable level during the first half, but there were very few owners who were able to benefit from the improvement in rates as their contractual commitments were relatively heavy. At least shipping programmes were well covered and very few ships had any idle periods.

During the second half of the year rates fell by 10 to 20% before a slight recovery in October and November. It should be noted that in this zone nearly all freights are now calculated in euros, which allow owners to keep in step with their costs and avoid losses on currency depreciation, which would have been the case had the billing remained in dollars.

Mediterranean movements are always split in two, based on the vessels' age and the quality criteria required by charterers. The older ships are less and less solicited in west and central Mediterranean and generally are to be found further east or in the Black Sea. None of these vessels show themselves up in northern Europe where there are strict controls by port authorities. Freight rates also increased in the first half of the year then fell back as from the summer to the levels of 2002. No improvement came later in the period.

On other trade routes, from North Europe to the Mediterranean and return, the same general fluctuations took place although on the latter movement the market was slightly firmer throughout the year.

On movements from the US to Europe the market remained stable up until the summer, when it suddenly took off to reach a peak in August. After a drop-back in the autumn, the market recovered significantly to finally overtake the summer highs. Consequently freight rates for lots of 2,000 tons went from $30 to over $46 per ton and for sizes over 5,000 tons from $23 to $40 per ton.

The trigger of this improvement was important movements of styrene, cumene and xylene as well as exports of small lots of chloric solvents and phenol.

On westbound transatlantic movements, after a spectacular recovery at the end of 2002, the freight market followed the same trends as for the US-Europe trade before tailing off in the third quarter, but stayed firm thanks to some spot activity in the clean petroleum products market.

As in 2002, the main spot movements out of Europe were with cargoes of MTBE, methanol and sulphuric acid. Freight rates for lots of 2,000 tons dropped from $33 to $31 per ton. Unlike in the past, this sector of the market was unable to resist the general pressure on rates and helped cause a more disoriented market between East and West.

Movements from Europe to Asia gave a much more contrasting picture, as apart from the months of June and July, which were affected by the SARS epidemic and its repercussions, there has been a continuous progression occasioned by a very strong demand from Chinese buyers.

This market consists primarily of contract movements with steady volumes in the hands of the four major chemical carrier owners, who have been able to occupy their fleet fully, thus preventing any supplementary space from being used. This situation has had the effect of leaving very little spot tonnage available, and rapidly rates in particular for small lots of 1,000 to 2,000 tons rocketed up with levels going from $60 to close to $70 per ton.

From an overall point of view, thanks to the good level of contractual nominations and to a healthy market for specialised chemicals with strong demand in Asia, the occupancy level of carriers has been excellent and rates have improved significantly.
 

The chemical carrier fleet has continued to expand in 2003 with about 50 ships delivered, being the follow-up to substantial orders placed at the end of 2001/2002, for a total of 0.96 million dwt over twice the tonnage delivered in 2002.

Ships between 10,000 to 20,000 dwt were some of the most numerous to join the fleet with 25 units, although the 30,000 dwt also represented a good share of total tonnage.

The orderbook is also rather healthy with about 60 ships ordered up this year for a total of over 800,000 dwt. Orders for coastal ships up to 6,000 dwt have remained limited as this fleet is quite young, and only 10 ships were delivered this year and up till now 10 other ships should be delivered in 2004 / 2005. The category of 6,000 to 10,000 dwt is more active with 30 ships on order.

It should be stressed that most orders continue to be placed mainly in Japan, and to a lesser extent in South Korea and China in the form of direct contracts or long time-charters with a purchase option. Nearly all European owners find this latter formula advantageous as it allows them to keep a control over their costs and the vagaries of the future market.

Scrapping of chemical carriers increased significantly with 19 ships sold, but this remains well below the number of new units being delivered.

The improvement of the market at the end of 2003 could augur well for 2004, as chemical carriers are one of the last sectors not to have benefited from the general flourishing of the shipping market.

Current and future negotiations on period contract renewals are crucial for owners, with rates on transatlantic, transpacific, and North Europe / Asia routes on the increase and to some extent catching up the lagging with spot rates. On the other hand contracts for European movements are at similar levels to those of 2002, despite a noticeable improvement within certain specific north European areas.

Some uncertainties still cloud the market, which are continuing in 2004, in particular the official investigations in hand under the American and European fair-trade laws about a suspected collusion amongst the four major owners. Odfjell has decided to come to a rapid arrangement and will be paying a heavy penalty to the American authorities. The other owners should in turn try to come to a quick settlement in order to clear up the problem and move on. Other legal actions are in hand involving charterers this time, which have a negative impact on business, and which will doubtless drag on for quite a time.

Another factor which could influence the chemical market in the medium term, but this time positively, is a proposal to transport vegetable oils exclusively in IMO II and III ships with effect from 2007. If this resolution is adopted by the IMO next spring, demand for chemical carriers would increase significantly.

Taken as a whole, the market should experience an upward pressure over the coming years, with the need to scrap older vessels combined with the increasing price of newbuildings as well as shipyards being fully booked, all factors pulling in the same direction. Above all however it will be the general level of the world economy, which will be the principal support for any lasting improvement.