Tanker market in the Middle East awaits petrochemicals upturn

19 October 2010

The Middle East’s investment in petrochemicals facilities will provide a boost to the shipping industry, but chemical carriers are still a niche business

Middle East petrochemicals in numbers

$170bn: Projected investment in the Middle East’s petrochemicals industry by 2015

30: Petrochemical plants expected to be completed in Saudi Arabia by end of 2011

Source: MEED

The Middle East is set to become the global hub for petrochemicals production over the next five years. By 2015, $170bn will have been invested in the region’s petrochemicals industry, with 30 new plants expected to be completed in Saudi Arabia within the next 12 months alone.

As the Middle East states look to maximise the value of their hydrocarbons reserves by investing in downstream activities, demand for chemical carriers is set enjoy parallel growth.

South Korea, Japan and China are the main shipbuilding countries hoping to take advantage of the boom in Middle Eastern petrochemicals production.  

Petrochemicals growth prospects in the Middle East

HJ Park, managing director in the Middle East for South Korea’s STX Offshore & Shipbuilding, says that while the current market for shipbuilding is concentrated on other types of vessels, the prospects for future sales of petrochemicals carriers are excellent. 

I think it will be a tough market for the next year, then you should see things improve

Atle Sebjornsen, Stolt-Nielsen

“Saudi Arabia and the UAE are both adding significantly to their petrochemicals capacity in the next few years,” he says.  “I think that when they are getting ready to take these products to the market, you will see more and more new orders being made for chemical carriers.”

STX has been operating since 1967 and has supplied many different types of tankers to the Middle East market, including chemical and crude oil carriers.

Park says that all shipyards capable of constructing the highly sophisticated vessels understand the demands and requirements of the clients in the region.

“You have to remember that many of vessels belonging to the Middle East countries carry the national flag of that country, so many clients have specific requirements regarding health and safety in both the construction and operation of vessels,” he says.

“If anything happened to a ship sailing under the Kuwaiti or Saudi Arabian flag or belonging to a state-owned company could destroy a country’s reputation.”

With regards to safety, chemical carriers have to be constructed to the highest standards. The interior tanks need to be airtight as the chemical composition could be compromised if the cargo comes into contact with the air. A film of nitrogen is usually applied on top of the chemical to prevent this occurring.

The tanks are either made of stainless steel or coated with a specialist paint to ensure that aggressive chemicals cannot attack the metal. 

Due to the technical specifications, chemical tankers are about 20 per cent more expensive to build than conventional crude oil carriers. Another influential factor is steel prices, which account for about 15 per cent of the total cost of a ship. The more technical a vessel, the more steel it needs.

Shipbuilders have to keep a minimum order book for more technical vessels even when the market is demanding other types of ships.

“There are a number of specialist technical workers who you need to keep busy,” Park says. “For example, welding stainless steel is a very difficult process and you need specialist painters to apply the coating to the tanks.”

“If you did not have enough orders or a competitor secures a number of chemical carrier contracts, then there is a real risk of losing vital personnel.”

The current trend in orders, both from the Middle East and globally, is for bulk carriers and container ships. However, there are still some chemical carriers being built in the Asian shipyards. Norway’s Odfjell has formed a joint venture with Saudi Arabia’s National Chemical Carriers (NCC) and ordered two 75,000-deadweight tonnage (dwt) IMO II class chemical tankers, worth $65m each.

The ships are being built by South Korea’s Daewoo Shipbuilding and Marine Engineering (DSME) and will be delivered in 2013.

The ships will be run from Dubai by the joint venture, NCC Odfjell Chemical Tankers, with both partners having the option to buy one more vessel each. The orders placed with DSME show shipping firms are making plans for a future upturn in petrochemicals production.

Cancelled Middle Eastern orders

However, other South Korean shipyards have not been so lucky in regards to Middle East orders. This year, SLS Shipbuilding Company (SLS) had to return deposits running into hundreds of millions of dollars for ships, after falling behind on delivery schedules due to the sheer amount of work it had taken on.

The cancelled orders included two units for the UAE’s Gulf Navigation Holdings (Gulfnav), four for Greece’s Ionia Shipmanagement, four out of a 10-ship series for the UAE’S United Arab Chemical Carriers and eight for Norwegian shipping company Stolt-Nielsen.

SLS refunded $70m for two 44,000-dwt chemical carriers to Gulfnav. The National Shipping Company of Saudi Arabia is also due to receive back the $95m it paid as a deposit for five 45,000-dwt chemical tankers.

Gulfnav’s chief executive Per Wistoft says that while the refund puts the company in a stronger position financially, it still means they are two vessels down. “Unfortunately, the SLS yard was delayed by more than a year and we had to cancel those two ships and receive our instalments back,” Wistoft says.

Wistoft says the company has not decided whether to invest the money in chemical or crude oil carriers.

Gulfnav currently operates eight chemical tankers, four built by SLS and the other four made by South Korea’s Hyundai Mipo. All have coated tanks and can carry between 22-29 different grades of chemicals.

Petrochemical charter deals

Four of the carriers are on a 15-year charter with the petrochemicals giant Saudi Arabian Basic Industries Corporation (Sabic). Each of the vessels are based in Saudi Arabia and are used to service Sabic’s clients in Europe and Asia.

“The Sabic deal is going well,” Wistoft says. “They are utilising all of the vessels to the maximum, which is encouraging. The four other chemical carriers we operate have all seen business pick up slightly over the past six months too, so that is also encouraging.”

The chemical tanker market is characterised by long-term contracts, such as the 15-year Gulfnav charter with Sabic. 

“You don’t have that many suppliers of tonnage in the chemical sector because it is not an easy sector to operate in,” Wistoft says. “So if you are a chemical company that wants supply security you can either take vessels on a time charter basis or find a company that can meet your specific demands.”

Stolt-Neilsen is one of the few shipping companies that can supply chemical tankers on a contract basis. “Middle East clients are different to other areas,” says Atle Sebjornsen, managing director Middle East and Indian Ocean, Stolt-Nielsen.

“The clients here tend to put more value on long-term partnerships and they tend to recognise consistency. The Middle East has more of a long-term partnership approach and you have to work hard to nurture these relationships.”

Demand for petrochemicals slumped in the wake of the financial crisis and this impacted the shipping industry as well. But as the global economy moves out of recession, sales of petrochemicals are expected to pick up.

“Petrochemicals is a cyclical industry and I think it bottomed out at the end of 2008 and early 2009,” Sebjornsen says.

“I think it will be a tough market for the next year, then you should see things improve. We are optimistic.”

As new petrochemicals facilities enter production, the case for shipping companies to expand their fleet of chemical carriers becomes more compelling. 

Shipbuilders and shipping firms believe that major investment in the chemical tanker market will be essential to ensure the supply chain is kept moving.

However, Sebjornsen warns that the chemical carrier industry is more complex than other shipping sectors.

“It is not as easy as ordering a couple of chemical carriers and then expecting to charter them as soon as they are delivered from the shipyard,” he says. “It is a lot more complicated than that.”

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