One Belt, One Road

In recent years mainstream Chinese economic rhetoric has focused on the nations slowing GDP growth rate and the government’s apparent short term policy focus, yet little light has been shed on the longer term picture. Media attention on the underlying “Going Global” strategy, nurtured by the nation’s leadership over the last decade, has been minimal. In this piece we will attempt to unpick the basic premise behind “China’s new Silk route”, more conventionally known as the “One Belt, One Road” (B&R) initiative. We begin by gaining an understanding of the underlying intricacy that led to its conceptions, while assessing the scope and scale of its potential. Following this, we discuss the incentives it may or may not provide for national, regional and global actors. Finally, we assess the implications it could have on the global maritime industry, and more specifically the Specialised Products market.

The “One Belt, One Road” initiative was first unveiled in the autumn of 2013 whilst Chinese President Xi Jinping visited Kazakhstan and Indonesia. Over the course of the state visits it became clear the initiative was built from two fundamental concepts; the land based “Silk Road Economic Belt” (SREB) and the ocean based “Maritime Silk Road” (MSR). The land based initiative aims to connect central China to Western Europe via a vast rail and road network that crosses through much of China, central Asia, the Middle East, southern Europe and Russia. Its ocean going sibling will travel from Shanghai to the Mediterranean via South East Asia, India and Africa. These routes are forecast to cover over 60% of the global population, reaching an estimated 4.4 billion people. Clearly the scope of these projects is vast, however these grandiose concepts have been kept deliberately vague, with many portraying them as a vision expressing China’s ambition rather than rigid development structure. The core principle of the B&R targets connectivity, with prevailing thought suggesting increased connectivity encourages investment, integration and trade.

These policy initiatives have developed in light of the nation’s domestic economic and structural investment issues. It is no secret that untampered public and private sector investment has led to huge industrial capacity and a national economy reliant on exports and construction. In to secure long term stability and security, the Chinese government is attempting to shift the economy away from an export driven primary industry model, towards a consumer driven, service based model. The B&R plays a fundamental role in achieving this, with the development of both the land and maritime trade corridors expected to aid in absorbing forms of excess. Initially it is thought that the vast overcapacity in the Chinese construction industry will be offshored, with regional and global nations relying on Chinese companies for infrastructure development. It is then theorised that the development of this infrastructure will then help alleviate the aforementioned industrial overcapacity, by promoting Chinese exports and curtailing economic weakness. This initiative is also characterised by the nation’s geopolitical aspirations. It is thought that through the enhancement of ties with regional and global actors the nation plans to increase its influence and solidify its role on the geopolitical spectrum. The method of regional and global infrastructure development lends itself to this, as it enables China to enhance ties to national actors through the loans and aid required to develop these initiatives.

So how does this affect the maritime industry, and more pertinently the Specialised Products sector? Clearly both the SREB and the MSR incorporate various threats and opportunities for the global maritime industry. On the one hand the creation of an efficient road and rail network from the east to the west could spell further trouble for an already wavering ex-Asia export market. Yet on the other hand the establishment of the MSR could undeniably benefit maritime trade. In terms of Specialised Products, whilst the establishment of these networks will likely bolster global demand, the export centric focus from China reduces its implications for the industry. Domestic chemical production capacity is far short of requirements, and whilst projects are in place, they will take years to establish and hence we expect heavy import reliance foreseeable future. Whilst exports play their part, it is Chinese Specialised Products imports that are of paramount importance to the market. To put this in perspective, Chinese Specialised Products imports equated to over 52 million tonnes in 2015, whilst exports for the same year reached just over 5.6 million tonnes. As we can see from the graph Chinese imports have by and large grown in volume since 2007, with an annual increase of 8% recorded from 2014 to 2015. That said, growth in the first 8 months 2016 was 3% slower than the same period in 2015. Clearly the scope and scale of the “One Belt, One Road” initiative is vast, and with the overarching goals expected to affect more than half of the global population, we must watch its development and expansion with a keen eye.


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The Panama Canal enters a New Chapter

The Panama Canal has entered into a new chapter in recent days with the opening of its long awaited third set of locks. The expansion project to achieve this almighty milestone has taken almost ten years and will allow significantly larger vessels to transit the Canal. Inevitably, it is expected that this will have a significant effect on global shipping markets. However, it’s expected that these effects will felt by some more than others!

The canal opened in 1914 and has become a key transit point between the Atlantic and Pacific Oceans. We note that nearly 14,000 transits of the canal were recorded during the last fiscal year, carrying approximately 230 million tonnes of cargo. According to Clarksons Research Services, this accounts for just 2% of total global seaborne trade. Whilst this may seem small, the canal is a key shipping lane for a number of vessel segments.

From a macro perspective the increasingly interconnected, globalised and consumer driven world we live in has brought about the dramatic upsizing of ships and thus there is a growing need for such vessels to cut their voyage times by transiting the Panama Canal. Indeed, as of 20th June 2016, more than 55% of total DWT capacity in the world fleet was accounted for by vessels too large to transit the canal. These facts alone are enough to see why the Panama Canal Authority embarked on this huge infrastructure project. The new larger locks will allow a higher number of vessels to transit, as the maximum beam has been raised to 49m, up from 32.3 m in the old locks, while the maximum LoA and draft will be 366m and 15.2m respectively. On this basis, 79% of the DWT tonnage in the world fleet will now be able to pass though the canal.

It is expected that the most significant sector to experience a positive impact will be the containers market, as well as LNG and LPG carriers. However, what impact will it have on the Specialised Products sector? Well the short answer is very little indeed!

Of the 3,038 IMO classed vessels trading in the Specialised Products fleet today, the largest that are regularly engaged in the chemicals business are 50,000 DWT Zinc coated sized vessels predominantly trading methanol. The maximum beam of such vessels is approximately 37m, with LoAs at around 190m and a draft of 13m. The point here is that any units in the Specialised Products sector that choose to use the Panama Canal will still be able to use the old locks, thus circumventing any potential congestion and delays at the new locks.

This is an important fact when one considers the estimated increase in US exports of chemicals from the US Gulf to the Far East. With a greater volume moved transpacific there will arguably be a higher number of transits through the Panama Canal. Any delays caused by congestion will obviously cause headaches for everyone. Panama based agents who are well versed in all things concerning the canal do not anticipate any more congestion than there is already with the incumbent two sets of locks. Of course, transit costs are also a factor here however to the best of our knowledge it seems the current tariff structure for the old locks will remain in place and be reviewed annually as before. Therefore as chemical tankers are unlikely to use the new locks, the new tariff structure in place here is not expected to have an impact.

At the end of the day, there will of course be some teething problems but as always the old adage of ‘Time is Money’ comes to mind. No matter which way look at it, ship owners and charterers alike will be looking to avoid any additional delays and the fact that the old locks can still be used is obviously a positive! Thus, we expect little notable impact of the expansions on the chemical tanker markets.


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Vehicle Demand – Driving The Future

The automotive industry and more specifically “new passenger vehicle sales” statistics serve good indicator when assessing the health, strength and stability of global economic growth. New car sales are clearly correlated with global macroeconomic conditions, as they provide unquestionable evidence of general market sentiment and consumer spending tendencies. Total global passenger car sales increased by 47% between 2005 and 2015, with developing nations providing the majority of this appetite and developed nations by and large sustaining consistent gains. This growth has undeniably had positive implication for global petrochemical markets as the vast majority of vehicle components and fuels are in one way or another derived from the multitude of products that make up the Specialised sphere. So the questions are, who is buying these cars and what effects will it have on the Specialised Products Markets in the future?

To understand why these questions are pertinent, we must take a step back and access automotive industries reliance on Specialised Products, as it spans from seats to tyres, engine components and the fuel required for upkeep and use. In fact petrochemicals and their derivatives contribute more than one third of the raw material cost of producing the average vehicle. On top of this, as stringent governmental environmental policy increases its global presence, the role of fuel blending and biofuels is becoming existentially more important and hence automobiles are increasingly dependent on Specialised Products from “cradle to grave”. With this in mind, clearly increased consumer demand for new vehicles provides an attractive prospect for all those involved in downstream production.

So what is the demand landscape? Whilst global economic stability is by no means secure, with fears and tension brewing in Brazil, China, the US and Europe, new passenger car sales have increased at an average rate of 4% year on year since 2005. The vast majority of this demand growth is centered on China, where passenger vehicle sales increased by 433% between 2005 and 2015 and this translates to an average yearly gain of 19%. If we relate this to Chinese GDP, which grew at a rate of “merely” 6.9% in 2015 we can see that average passenger vehicle demand is far outperforming GDP growth. This growth in vehicle demand is not only driven by a burgeoning middle class but also technology, which has enabled manufactures to produces vehicles that are affordable and usable to a broader array of the population. As the last addition of this report highlighted, Chinese Specialised products demand grew at 8% last year and a large part of this growth can be attributed to vehicle manufacturing and maintenance, hence the visible upward trajectory provides a positive indication for cargo demand into China. At the same time in India demand has increased at an average rate of 10% per annum over the period in question. Whilst this relates to a smaller number of vehicles than China, it is still a phenomenal number of new vehicles. With both these key developing economies clearly exhibiting an enormous appetite for new vehicle consumption, and the U.S. and Europe maintaining growth, Petrochemical related production faces a healthy outlook.

The above has nothing but positive connotations for the Specialised products market. As global population growth continues and people have higher disposable incomes, these fundamentals paint nothing but a bright future for the automotive industry and its supply chain.

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A Modern Day Tempest: El Nino & Its Effects on the Palm Oils Market

The world weather systems are currently in the grip of El Nino, a naturally recurring phenomenon which is associated with a band of warm ocean water that develops in the central and east-central equatorial Pacific. Essentially this induces a change in normal weather patterns and can severely impact the economies of developing nations within the pacific region associated with it. Agriculture can be one of the hardest hit industries due to abnormally prolonged period of high heat which affects crop yields and lowers production output. In terms of the Specialised Products market, the key commodity which suffers is palm oil with almost 90% of global production coming from Indonesia and Malaysia.

Production, pricing and the export capability of both countries in the region have been especially volatile since the El Nino was first observed. According to the World Meteorological Organisation (WMO), this El Nino will probably rank among the three strongest since 1950. Data shows that it could be comparable to record events in 1997-1998 and 1982-1983. In the top two palm oil producing nations, output fell by 5.5% in Malaysia and 7.2% in Indonesia in 1998, and production slid by 5.1% in Malaysia in 1983. In comments made to Reuters and Bloomberg at the end of March, a leading industry analyst-Dorab Mistry, has forecast that Malaysia’s output in the 2016 season (which ends in September) could drop by as much as 2 million tonnes compared to a year earlier. Meanwhile, according to the Indonesia Palm Oil Association (GAPKI), output is expected to fall in February to 2.3 million tonnes from 2.4 million, due to drought and forest fires, whilst annual output is expected to fall to 32.1 million tonnes, its first decline since 1998.

So what does this all mean for shipping in the Specialised Products markets?

Seaborne palm oils trade is a key a driver for shipping in the South East Asian region with exports to China, India and longer haul to Europe characterising much of the trade. According to the Clarksons Platou Specialised Products Analysis trade statistics, Indonesia exported 20.7 million tonnes in 2014 whilst Malaysia exported 14.5 million tonnes. Clearly this represents a huge market but with the output data outlined above there is little argument that 2015-2016 exports may reduce. In fact, Indonesia exports are forecast to fall to 1.95 million tonnes in February of this year. Export volumes will not be helped by the bullish sentiment that has developed for Crude Palm Oil futures (CPO) on both the Malaysian and Indonesian exchanges as production falls and supply dwindles. Over the last year, futures on the Bursa Malaysia Derivatives Exchange have risen by 543 ringgit from 2,233 ringgit in April 2015 to 2,776 ringgit in 2016; an increase of 24%. The situation here is not helped by increased domestic demand in Indonesia with biofuels regulations mandating an increase in palm oil use in biodiesel production. The country’s B20 program, which mandates a 20% minimum palm content in diesel, will lift domestic consumption providing a floor for product pricing. Another direct result of higher palm oil prices is more interest in buyers for cheaper soybean oil from South America, something that is happening in India as we speak. Both commodities can substitute each other, with food and fuel processors tending to switch between both depending on pricing.

The bottom line of this for Specialised Products is that there will be less employment opportunities for owners, particularly if one considers the number of newly built MR product tankers and 19,900 DWT IMO II stainless steel seeking business for virgin tanks from the Straits to the continent. So an increased supply of tonnage, putting pressure on freight rates is possible. Meanwhile, an active ex-US transpacific trade and ex-South America soybean oil trade exacerbates this further with tonnage unable to find backhaul opportunities after discharge in Asia.

It is clear that El Nino presents significant issues for producers and ship owners; the phenomenon is supposedly now easing off with the WMO saying in its latest February release on the subject, that it has now passed its peak strength with neutral conditions returning Q2 2016. Of course nothing is set in stone when it comes to the natural world but there is little doubt that the market will likely remain challenging for a little while to come for all stakeholders.

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Oil Price Recovery: Political Shadow Games vs. Economic Woes

In recent weeks we have seen the Brent crude oil price recover from its record January lows when prices of the global benchmark dipped to as low as $27 per barrel, a massive 70% fall in price since June 2014. Today however, prices have recovered somewhat with the benchmark now pegged at around $41 per barrel. Oil prices are difficult to predict and although several top Wall Street CEOs, oil analysts and international energy organisations (the IEA for example) try and give guidance in an effort to reassure the markets it rarely works out the way they see it. Bloomberg comments a leading investment bank said that the oil market had ‘bottomed’ back in May/June last year, price promptly fell from around $60’s per barrel to the low $40’s by August. The same has been said by the IEA about this latest resurgence, although it is not so clear yet whether it can be sustained. That said, since January the global benchmark is now $14 up on its lowest point. The current forecast price from the Reuters end monthly Oil Poll, taken from top investment bank analysts, shows a 2016 expected average price $40.1 per barrel, and $53.9 per barrel for 2017 with forward swap curve showing contango, ie. Future spot pricing for faraway deliveries is higher than the current spot price. There is little doubt that from a macro perspective that large peaks and troughs in oil pricing will filter down to Specialised Products transportation due to the broad spectrum of chemicals, lubricants, vegetable oils and palms oils that constitute this market and its close relationship with the end consumer.

So what has prompted the recent increase? Oil prices are affected by a whole range of different factors and are largely uncontrollable. However, the lion’s share of influence can be left at the geo-political door with decisions largely made on economic and supply/demand considerations. Often these decisions have been cast as politically self-serving, OPEC’s refusal to cut production levels being a case in point here. The steadfast refusal to cut production, in the face of increased US shale oil production, to boost pricing has been kicked deftly into the corner. Whilst this is a political and largely economic game other factors such as war, terrorism, regulation and taxation also play a part here.

Despite these closed door discussions and negotiations, the recent announcement from OPEC that Saudi Arabia and Russia that they would freeze production at current levels represents the first example of cooperation between an OPEC and non-OPEC producers in 15 years. In an effort to end the global supply glut a meeting will now take place in Qatar on 17th April led by Russia to agree a supply deal. The outcome of this is not certain but along with a weaker US dollar and stronger seasonal demand, it certainly adds weight to the IEA’s assertion that prices had ‘bottomed’ out.

Meanwhile, the number of US oil rigs still operating has fallen to historic lows with the number now at 94, a 90% fall from peak levels seen five years ago but this has not dampened production levels. The EIA is forecasting a total of 8.7 million barrels per day in 2016, a minor fall from 9.4 million barrels per day in 2015. Despite the stress felt by US producers, levels still continue to rise. This coupled against a backdrop of weakened oil demand from China doesn’t exactly help the rhetoric that this resurgence is sustainable. Another point here is the spectre of Iran and the fact that it will refuse to sign up to a production freeze, a fact that is hardly surprising considering its recent re-entry to the global market place. Question marks over the longevity of sanctions relief also remain unclear with the outcome of the US Presidential election.

So where does this leave the Specialised Products markets? From a petrochemical production perspective Europe and Asia have been given a margin boost due to more competitive naphtha feedstock pricing whilst arguably shale gas derived production has had its price advantage eroded somewhat. This is old news and for now the rise in oil pricing will unlikely cause an immediate change to the status quo. However, in the last couple of weeks producers with interests in US shale gas have been marking their lines in the sand. Valero has said that they have decided to shelve their methanol project indefinitely whilst Sasol are also delaying progress on their ethylene project at Lake Charles.

The oil price outlook is certainly an interesting debate and is one that will no doubt continue to rage on. All parties have differing viewpoints and with the April 17th meeting on the horizon, only then might we have greater clarity on exactly how ‘resurgent’ oil prices are!

Oil Barrels with Red Arrow isolated on white background. 3D render

Oil Barrels with Red Arrow isolated on white background. 3D render

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Global Cracker Margins – Playing Matador with the Naphtha Bull?

It’s no secret that the European and Asian naphtha cracker operators suffered in the days that oil exceeded $100 a barrel, as they found themselves at a significant disadvantage to those running natural gas based ethane crackers. Back in those days, high oil prices translated into high naphtha prices, which in turn ate away at downstream producer margins making naphtha an uncompetitive feedstock for chemical producers. The onset of the US Shale “revolution” compounded these issues, as domestic gas production increased and ethane price tumbled, naphtha based production offered a declining economic incentive. However, as the shale phenomena grew in size and scope its effects were felt across numerous markets, most notably the crude market, which has undergone mass price declines since mid-2014, sinking to 11 year lows in December 2015. These price declines have subsequently been passed on to naphtha, the impacts of which fundamentally altered geographic cracker margins and shifted decades old forces back towards Asia and Europe. Asia has in fact been labeled by some industry watchdogs as one of the unexpected star performers in 2015.

Once branded “uncompetitive”, Asian petrochemicals producers have earned record margins over the course of 2015, and as a product of low feedstock pricing they have stormed a market previously dominated by producers based in the Middle East and United States. Crude price declines have fueled the renaissance in naphtha based cracking, and with little sign of OPEC and non-OPEC coordinated production cuts and new Iranian capacity set to appear due to the recent sanctions relief, crude pricing is likely to perpetuate naphtha’s competitive advantage into the near future.

This newly recovered competitive advantage has seen Asian and European producers running their facilities at higher running rates so as to take advantage of these favorable margins. Whilst one would assume the market would therefore be awash with ethylene and further related downstream products, this has not been the case for a number of structural reasons including a boost in both global petrochemical and gasoline production which has aided naphtha cracker margins on their elevated path. Crackers that use naphtha as a feedstock, such as those based on Jurong Island, Singapore have enjoyed their highest profits in 10–15 years, according to industry sources. The effects of this profitability can be seen with the growth of some specialty chemical firms in the region. For instance, both Solvay and Croda opened and expanded new facilities in the area as they attempt to take full advantage of the current situation.

Perhaps most pertinently OPEC has suggested that “Naphtha is expected to be the fastest growing refined product with an average growth of 1.3% p.a. between 2014 and 2040, rising from 6.1 mb/d to 8.7 mb/d,” in its world oil outlook for 2015 and they predict that almost all of this growth will come from the Asian Pacific region. That said concerns have been raised as to the stability of this trend considering the relatively perilous situation that crude markets teeter on the edge of.

For the Specialised Products markets the current naphtha versus gas price relationship raises some interesting questions. These mostly concern the status of US shale gas projects: industry sources report that when Brent crude falls below $28 a barrel and Henry Hub gas prices exceed $4 per MMBTU shale gas based projects lose their economic competitive advantage compared to naphtha based production. Naturally, there has been some debate over whether this threatens the US shale gas phenomenon but so far, with the exception of a very brief period, the above conditions have not been reached. The other area of interest is one of demand levels. As one would expect, the transfer in buying power from producer to consumer has boosted demand for chemicals and petroleum products. This is obviously good news for our sector as with greater demand comes increased seaborne trade but as always with all things surrounding oil prices, things can change in a heartbeat which may reverse all of this in little more than a flash!

josh blog

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What next for the petrochemical sector in the Middle East?

Over the past 30 years, the Middle East has become a key producer and major exporter of petrochemicals to world markets. A fact that has not been lost by its key beneficiaries, namely the Gulf Cooperation Council (GCC) comprised of Bahrain, Kuwait, Oman, UAE, Qatar and Saudi Arabia. Buoyed by locality of feedstocks and the regions proximity to Asia the GCC has been able to capitalise on its advantage and raise its competitiveness in the face of more traditional producers in Europe and lack of domestic capacity in Asia. However the global slump in oil prices, a shortage of advantaged feedstocks, and a large buildup of petrochemical capacity in the United States based on cheap shale gas has brought about a change in strategy. The regions woes may be further compounded by geopolitical developments following the renaissance in diplomatic relations between the West and Iran. The lifting of sanctions on the latter being imminent following an agreement to scale back and increase the transparency of its nuclear programme. The perceived resumption in large scale oil exports that this may bring could weaken the worldwide oil supply-demand balance according to analysts. It may also drive increased petrochemical investment in the country which represents its own issues.

CAGR production growth over the past 5 years has been assessed at 8% according to the GPCA but set against a backdrop of slowing Chinese growth, falling oil markets and challenging product prices GCC producers have seen sales decline to just under $88 billion in 2014 from $89.4 billion in 2013. All of these issues have meant that the GPCA has cut its growth forecast from 8.3% to 7.5% on a CAGR basis for the next five years. Confronted with all this, what can the Middle East do to maintain its position?

One answer would be innovation. There is certainly a shift away from bulk chemicals in recent years; to a greater focus on intermediate and speciality volumes – the Sadara project being one such example. Another answer would be one of more a strategic focus on where to place capital investment. The uncertain short term outlook that the prevailing wider market conditions have brought have led to two major projects being cancelled in Qatar. Firstly, the Al Sejeel project – a joint venture between Qatar Petroleum (QP) and Qatar Petrochemicals Co. – was shelved due to high investment costs. Whilst QP and Shell cancelled the Al Karaana project earlier this year, QP has said that they are studying other downstream alternatives in order to diversify and increase its share of the market. Indeed, the Middle East is still largely gas based, approximately 70% of the regions ethylene production is from ethane compared with global average of just 30%, according to IHS. As a result and due to the erosion of competitiveness, we see that the likes of Saudi Aramco and SABIC (along with its affiliates) are pursuing investments using other feedstocks such as naphtha and other liquids to compliment ethane. The Sadara project will be based on mixed feedstocks as will the Liwa petrochemicals complex.

The answer to the Middle East’s conundrum is therefore multifaceted. A combined approach of focusing on feedstock optimisation and diversifying into downstream products seems to be the way forward for the regions producers. This is particularly poignant when one considers that most oil and petrochemical majors are facing a challenging earnings environment and obviously the GCC wishes to combat this. The issue of Iran is a factor but we must treat it lightly. Whilst the agreement with the P5+1 has been passed by the Iranian Parliament and the Guardian Council as well as the fact that President Obama has now secured enough votes to get the treaty through the US Senate the likelihood of sanctions relief is high. Iran has been vocal in its plans to increase petrochemical capacity with many projects now slated. However, in all likelihood the levels of investment required is some way from fruition with Iranian technology and infrastructure needing huge levels of modernisation and investment. There is no doubt that Iran remains a factor in the region but it does not represent as much of an immediate threat to the GCC, as the media and Iran itself may have us think. Whatever happens the Middle East is a region which continues to be on the move and the Specialised Products markets will be intrinsically linked to these developments.

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What does the rise of the US Dollar mean for the Chemicals Markets?

The rise of the US Dollar in the last twelve months has been something of anomaly. When pitted against an uncertain global economic backdrop such as economic turmoil in the Eurozone over Greece, amongst others, along with Japan struggling and ongoing concerns over Chinese economic growth, the reason of the rise of the American greenback currency is not so clear. However, others say this is not at all surprising with the US economy performing well – the IMF predicts that GDP growth will be at 3.1% this year – the rise of the currency becomes much easier to grasp.

In simple terms the mechanics of this are quite easy to decipher. With suggestions that US monetary policy may tighten in the future along with other central banks across the globe loosening or sticking to their policies, investors can make higher returns from dollar denominated assets. Thus inducing capital investment and boosting the value of the dollar. However, while this may be the upshot for those with dollar assets, American firms that sell abroad are hit. According to the Economist, about one quarter of the profits in the S&P 500 are earned in foreign currencies. This is a fact that has not been lost on some chemical producers in recent results releases. Matters are complicated further when one considers the issue of oil prices and how the subsequent decline of commodities linked to oil have eroded profit margins. All of this, against the uncertain global economic climate outlined at the start of this article.

However, we must ask the questions – what does this mean? How does it affect the chemicals markets?

The answer to both of these questions is somewhat of a double edged sword. By their very nature, chemicals are intrinsically linked to crude oil price and therefore any price fluctuations in the latter with affect the prices of the former. Therefore, we end up with challenging profit margins. For example, speaking on their Q2 results BP’s Chief Executive said “The external environment remains challenging…In the past few weeks oil prices have fallen back in response to continued oversupply and market weakness”. So on the one hand you have the issue of crude oil but then the added issue of the US Dollar also comes into play. If we take Sasol’s latest earnings release for example, the company notes whilst earnings increased, the group’s overall profitability was “adversely impacted by a 33% decline in average Brent crude oil prices…[but] this decrease was partly offset by a 10% weaker average rand/US Dollar exchange rate”. Thai chemicals producer, Indorama Ventures, also noted that the strong dollar aided their latest round of results despite a global economic concerns. It is clear here then that the strong dollar can have a large effect. On the other hand, the US specialty chemical producers, such Axalta and FMC, saw the strong dollar takes its toll on their earnings when foreign currency conversions made their unfavourable presence felt. In the petrochemicals world US based company’s such as Du Pont, Hunstman, Dow Chemical & LyondellBasell face some headwinds as Chemweek comments that ‘second quarter financials show US commodity and diversified chemical producers [are] benefitting from a recovering domestic market but [are] challenged abroad by the strong US Dollar”.

So the answer here is clear. The chemicals markets are no doubt affected by these factors and some are obviously more positive than others. However, against the backdrop of current global uncertainty it seems that most would argue that the march upward of the US Dollar is just one more worry to add to the office in-tray. If and when the Federal Reserve or other Central Banks being to change their monetary policies is the point at which this current status quo maybe be broken but it may be more welcome to some than others!

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Crashes, Devaluations & Jitters: What does the stock market crash in China mean for the Specialised Products markets?

Over the last few months concerns over economic growth were thrown around with much abandon but it was not until two weeks ago when the People’s Bank of China (PBoC) devalued the Yuan that such concerns reached fever pitch. Subsequently to this, poor data released on Friday showed that Chinese manufacturing had seen its fastest decline in six and half years, triggering big losses on the Chinese stock markets. The Shanghai Composite Index fell by more than 8% yesterday in what Chinese state media has dubbed ‘Black Monday’. Other major indexes such as the FTSE 100, Dow Jones Hang Seng and the Japanese Nikkei also suffered heavy losses. Understandably, this fall has led to considerable concern. Data from Reuters shows that shares in China have dropped 38% since its mid-June peak, erasing all year to date gains. These are big numbers and as one would expect the ‘talking heads’ of 24 hour rolling news have jumped on them with the usual doom and gloom characteristic and are talking the subject to death. However, the facts seem to be somewhat misrepresented and the usual scaremongering technique is prevailing.

Let us drill into this a little more. The PBoC’s original aim of devaluing the Yuan against the dollar was to boost exports, such an action was supposed to prop up exports which have been languishing throughout 2015 (July exports saw an 8.3% year on year contraction) by making them cheaper (of course, it has the opposite effect for imports). In reality, it was interpreted by investors as a sign that the economy is weaker than expected as the string of disappointing data releases has now confirmed. The IMF expects China to post 6.8% in economic growth this year, decelerating from the 7.4% registered in 2014. So therefore, it is no wonder there has been such concern. But is it really as bad as we are being told? As the time of writing, the Chinese stock market was actually up 40% year on year, and the European stock exchanges seem to have recovered with the FTSE 100 up 3.5% on yesterdays close!

Unsurprisingly, this has led to questions of import demand which of course is a key driver for the Specialised Products markets. China is the world biggest consumer and importer of chemicals with the latter totalling 49.5 million tonnes in 2014 according to the Clarksons Platou Specialised Products seaborne trade statistics. There have been suggestions from some quarters that 2015 chemical imports have been flat but according to our data, imports began to recover in March of this year after a negative January and February. Imports averaged a 3.6% increase year on year during the first half of 2015 to 25.7 million tonnes of which 19.4 million tonnes was organic chemicals. This is also reflected in freight rate performance, particular on the transpacific trade lane where levels are up 49.6% year on year. These figures suggest a much more positive performance than was thought. Whether the current financial issues will affect Chinese chemical import demand in the coming months is not so clear. One rather bullish article in the Financial Times recently suggests the Chinese construction market, which accounts for 10% of GDP, may have lost its boom but it is far from disaster with the Chinese still likely to buy 10 million homes this year with high deposit requirements. This of course will have a knock on effect for chemicals imports needed to produce construction materials and consequential household goods.

Despite the fact that we must exercise caution as the situation is continuing to develop as we speak (Chinese interest rates have just been lowered on effort to support the economy); things do not look so gloomy if we take all these factors into account. What is clear is that we may have entered a ‘new normal’ lower growth environment of 6-7% per annum. This certainly represents a downturn for an economy that has been traditionally export led to one of increasing domestic consumption. However, this is against a backdrop of a lower growth environment related to an economy that is a lot bigger than it was ten years ago, and such small percentage changes represent sizeable nominal values. As the data shows, the Specialised Products markets remain resilient so far and so for now the stock market correction may be nothing more than that!!


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What does the Iran deal mean for the Specialised Products shipping markets?

The western world was greeted yesterday morning by various news alerts that a historic agreement had finally been reached between the P5+1 (US, UK, France, Russia, China & Germany) and Iran over the latter’s nuclear programme. This agreement comes after twelve years of failed talks, a stringent UN and EU sanctions regime and varying levels of sabre rattling, grandiose rhetoric and aggressive discourse. Primarily, all of this was driven by high levels of bitter antipathy between the United States and the leadership of Iran but was often stoked by Israel, Saudi Arabia and other opponents of the deeply conservative Iranian state. President Obama has long championed the benefits of diplomacy and engagement rather than containment and isolation as favoured by his predecessor. From the moment he took office in 2008, Obama has sought to salvage a relationship with Iran in the hope that it would help bring about a more peaceful Middle East and remove the spectre that the US saw itself as a ‘global police force’. The agreement yesterday will, if approved by US Congress, lift economic sanctions on Iran in return for long term curbs on its nuclear program. The West has long suspected that the Iranian leadership has been looking to develop nuclear weapons.

There is no doubt the deal is historic and much like US rapprochement with Cuba, the deal will be an integral part of the Obama Presidential legacy. It is a humbling feeling when such a geopolitical event will have an effect on almost every international industry – shipping is no exception. Some of the sanctions imposed have meant that there has been heavy prohibition of the sale of oil and petrochemical products. Before the sanctions Iran produced 10% of world oil output and totalled 21% of OPEC’s production. According to OPEC, Iranian crude oil production reached 3.2 million barrels per day in 2010 but last year this had fallen to 2.8 million barrels per day. Due to sanctions, production and exports fell heavily with almost all exported crude going to China and India who did not support the sanctions. In terms of petrochemical products, Iranian petrochemical exports, according to Clarksons Platou Specialised Products data, totalled 6.5 million tonnes in 2011 and has subsequently reduced to 5.6 million tonnes in 2014. Clearly, the new deal could release roughly 1 million tonnes of exports back into the market, so there certainly will be an impact although maybe not at the same scale that many might assume. Reports emanating from Iran suggest that there is a drive to increase petrochemical capacity and several projects have been announced, but it is unlikely that these have been built yet due to a lack of parts needed from other regions. Therefore, looking further ahead the market may find itself flooded with key petrochemicals such as polyethylene and methanol (according to ICIS) in the not too distant future.

These are all interesting developments but any ramp up in production and exports is expected to be gradual and is far from set in stone yet. Before the deal can be implemented it must be ratified by the Republican controlled US Congress within 60 days who will likely vote it down. President Obama has already said he will veto this but this can subsequently be overturned by Congress with a 2/3 majority in both houses. Although political pundits expect this is unlikely to happen as a large number of Democrats would have to go against their President for it to happen. The reaction around the world has been positive on the whole, apart from the notable exception of Israel and perhaps Saudi Arabia (although not publicly). All this said, the deal looks set to be upheld as long as both parties keep to their terms and thus there is little doubt that it will be a welcome change to the Specialised Products markets. Lastly, with the global oil price environment already uncertain and the likelihood of Iranian barrels flooding the market could this further boost seaborne petrochemical trade? Time will tell, and the change will be gradual but all will be watching with baited breath!

josh blog

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