October 2024 | Surging Crude Utilization, Methanol's Oversupply, and Chemical Tanker Challenges Amid Global Shifts

The tanker industry, historically slower to embrace innovation than oil & gas and other sectors, is currently experiencing notable changes driven by evolving market conditions. Traditionally, innovation within the tanker market has primarily manifested through trading patterns and ship utilization shifts. Recent broker reports, however, indicate a significant increase in the use of large crude oil tankers, specifically Very Large Crude Carriers (VLCCs) and Suezmax vessels, for product trade—a deviation from typical industry practices. While it has been customary for these tankers to carry products during delivery voyages from shipyards, continued product trading is far from the norm.

This shift is driven largely by economic factors: larger ships carrying bigger cargoes at lower freight rates. The current slowdown in China's economy, which imports 80% of its crude oil, has left a surplus of VLCC tonnage in the market—these vessels primarily load refined products like gas, oil, and diesel to mitigate contamination risks. The impact on the chemical tanker market is substantial, as chemical-capable medium-range (MR) tankers, often called "swing ships," are dropping into more straightforward chemical trades in search of cargo. One limiting factor for VLCCs, however, is infrastructure. Few global facilities are capable of efficiently loading or discharging such large ships, which presents challenges that are only partially mitigated by ship-to-ship transfers.

Methanol Market: A Surplus and the Switch to Dual Fuels

The global Methanol market is oversupplied, exacerbated by weak demand and high inventories. Looking ahead, an anticipated supply deficit of green Methanol has led some shipowners to consider switching to LNG as a dual fuel option. However, 2023 saw a critical turning point, with the number of dual-fuel Methanol ships surpassing LNG vessels on order books for the first time.

Despite these developments, The demand for Methanol in Q3 has weakened. However, some quarters are optimistic that lower interest rates could lead to a rebound in consumer demand for homes, appliances, and automobiles, all of which are key drivers of Methanol consumption. In the Americas, Methanol consumption is expected to rise by 3.3% this year, fueled by a slight improvement in construction demand. Meanwhile, in Europe, improving economic conditions are anticipated to ease the current supply-demand imbalance in the Methanol market.

Geopolitical Tensions and the Middle East: Straits of Hormuz and Global Supply Chain Risks

Amid the ongoing hostilities in the Middle East, the chemical tanker market and global supply chains face potential disruptions. The Strait of Hormuz, where 24 million tons of chemicals are transported annually, represents a key chokepoint. Should this vital route be compromised, the global chemical trade would suffer, as there are no feasible land alternatives, and rerouting through Oman could be more efficient.

One factor often overlooked in these dire scenarios is the influence of China. As Iran's largest trading partner, China accounts for 33% of the country's total exports. If Iran were to block or hinder transit through the Strait of Hormuz, it would likely cause severe damage to its own economy, a point that tempers predictions of extended disruptions to chemical and oil trade in the region.

Clean Tanker Rates Plummet Amid Market Conditions

The Medium-Range (MR) tanker market, which typically services clean product trades, has seen rates fall dramatically. Some routes yield as low as $6,000 per day—a decline of over 70% from 2022 levels. This downturn is due to reduced demand, compounded by adverse weather conditions in the U.S. Gulf and Asia.

The chemical tanker market, historically more stable than crude or product tankers due to long-term contracted cargo agreements (COAs), has experienced a lesser impact. Chemical tankers operate in a niche market requiring specialized ships, crews, and management, which is a natural entry barrier for new players, including private equity firms. Unlike crude and product tankers, chemical tankers do not operate as speculative asset players but rather engage in more strategic transactions, such as the recent Navig8 and ADNOC deals.

For private equity investors, who typically look to exit their investments within 3-5 years, the chemical tanker sector poses additional challenges due to its specialized nature and illiquid sales and purchase market, distinguishing it from the more volatile crude and product tanker markets.

The tanker industry is grappling with significant shifts across multiple sectors. The increasing use of VLCCs in product trades, a surplus in the Methanol market, geopolitical risks in the Middle East, and declining MR tanker rates all contribute to an evolving market landscape. While chemical tankers remain a relatively stable niche, external pressures reshape the broader tanker industry dynamics.