A number of drivers determine freight in the base oil shipping market. First perhaps is the state of the world economy. Ultimately, demand for both petrochemicals and base oils reacts to the world economy, and that in turn defines shipping demand. Whilst there is a very negative feeling within Europe – where at this writing the average GDP is expected to decrease by 0.5 percent in 2012 – there are some positives to be drawn from economies such as China, where growth currently is 7.5 percent. That may be down from before, but still represents expanding demand for material and therefore shipping space. Regions such as India, Latin America, South America, Southeast Asia, Russia and even the United States are all predicted to see growth in their economies.

Closely linked to world economic activity is the price for crude oil. Crude is an important driver for chemical feed-stock prices, which recently have been very volatile, and ultimately shapes consumer demand and therefore how much material is shipped worldwide. Crude oil has a secondary function, too, as it also dictates the price for bunker fuel, one of the key drivers for freight.

According to DVB Bank, the volume of chemicals to be shipped during 2012 will rise by 4.4 percent to just short of 190 million metric tons worldwide, with a further 5 percent increase in 2013. Much of that demand will come in the shape of deep-sea shipments rather than coastal movements, and what that means is that the ton-mile will increase – i.e., voyages will typically be longer and employ each ship for longer. Much of this new demand will be focused on exports from the Middle East, where shipping demand has been growing constantly year-on-year, with some 23.11 million tons shipped during January to September 2011.

Shifting to tonnage supply, assuming a maximum trading life of 20 years for a vessel (though some majors specify 15 years, and some even will not accept a ship older than 10 years), we can see that the fleet has grown steadily over the past four years and currently numbers just over 2,200 vessels in the 5,000 to 40,000 deadweight ton (dwt) sector. This equates to some 39 million dwt. It is also a fairly modern fleet, with many ships added since the year 2000. (See graph, page 38.)

However, looking forward, we can see that there will only be around 130 new ships of this size added to the fleet in 2012, with just a handful of new orders for 2013 and 2014. The reason for this is that ship owners have no incentive to invest in new tonnage. Almost without exception, every single chemical tanker is operating in the red, and has been for the past three years.

Operators have ample tonnage already, and if they cannot make money with the ships they already have then they do not need more ships. Furthermore, banks are reluctant to expand their shipping portfolios since they are already too exposed as it is, not just with chemical tankers but almost all other forms of shipping.

If we are to assume a maximum 20-year life for a chemical tanker, so too we must delete existing ships from the list once they reach 20 years old, and this diminishes the fleet by some 90 vessels to the end of 2014. The picture therefore is one of a modern fleet, but with very few new additions over the next couple of years.

Taking a look at the realm of Medium Range (MR) tankers – the workhorses of the crude oil market – we see a similar picture. Ship owners there are also making substantial losses, while the composition of the fleet is made up of a lot of modern tankers.

Some 155 ships are due to enter the MR market to the end of 2014 but not all will come, as owners are keen to cancel the moment the ship-yard runs late in its delivery schedule. The point is that chemical tankers can easily enter the oil sector and offer to carry crude cargoes, but not vice-versa. MR crude carriers, unequipped with tanks in the desired capacities meeting International Maritime Organization requirements, and without fully trained chemical crews, will find it harder to make the transition into the chemical trade.

We must also grasp what is happening in the vegetable oil sector, since chemical tankers are the ship of choice for vegetable oils. With a growing world population, there is an ever-growing need for more vegetable oils; total world production reached just over 179 million tons in 2011. This year, a further 6.6 million tons will be added in the growing season up to October 2012, of which some 3 million tons will become exports.

Much of that extra demand for shipping space will come out of Indonesia and Malaysia, the worlds two largest palm oil producers. By definition, much of this material will need to be shipped on long-haul routes back to Europe, the United States and India.

Another alternative demand for chemical tankers that will exert more pressure on space is biodiesel. Biodiesel demand is growing due to various government mandates worldwide. Argentina and Brazil currently supply much of this demand, with a lot of material moving to Europe, where imports have reached some 2.6 million tons.

The United States, too, is a major player in the biodiesel world, with output of around 2.5 million tons, although exports hinge heavily on export tax credits. Similarly, in many countries, biodiesel needs to be subsidized in order to remain competitive, and it is this kind of background that makes it hard to establish how much biodiesel will eventually be shipped. Or more correctly, where it will move to and from. But the mandates suggest demand will continue to grow, and the IEA forecasts it will reach 2.2 million barrels per day by 2016, up from 1.9 million b/d in 2012.

Ethanol is in a similar position. Ethanol is shipped to a large extent on chemical tonnage, although there is increasing use of MR tankers in order to reduce freight costs. The United States is the worlds largest producer, and exported 1.19 billion gallons of ethanol in 2011, with much of the material moving on long-haul routes to Europe and Brazil.

Brazil itself is expected to produce 24 billion liters (6.2 billion gallons) of ethanol in 2012/2013, up 4.8 percent on the previous year, but exports will depend largely on domestic demand and pricing. This makes it harder to establish how much ethanol Brazil will actually ship.

Another freight factor is the environment. Since July 1, 2010, any ship trading in European waters has to burn fuel oil containing 1 percent sulfur or less. We calculate the average additional cost for a ship owner is $31 per ton, compared to burning a normal 3.5 percent sulfur fuel oil. This cost has to be either absorbed by ship owners, or added to the freight bill.

It is not just in Europe either. Starting Aug. 1, the United States will adopt this same procedure, and many more countries plan to introduce similar Emission Control Areas over the next couple of years. It does not stop there either. Further legislation is expected to protect the environment from emissions of NOX, CO2 and diesel particulate matter.

And last, but not least, the cost of bunker fuels is a major driver for freight. A typical 13,000 dwt tanker burns 20 metric tons of 3.5 percent sulfur fuel oil per day while at sea, with a further 1 to 2 tons of gasoil. That gives a total bunker bill of $14,800/day, based on Houston prices at the beginning of May. This is a major expense, and is typically around 60 percent of the vessels daily operating cost.

So what does this mean for the base oil shipper? Essentially freight, and whether freight is up or down. There is however one further driver to freight that only becomes apparent when looking at freight graphs. This is namely the actual availability of tonnage on the day of shipment – very hard to quantify or predict. This is why most shippers use a ship-broker since they are in the best position to advise on current conditions.

We feel that 2012 will be the year that shapes the shipping industry. We predict consolidation, with the larger owners becoming larger, with a few notable exceptions. Ship owners will react defensively to market conditions and will probably form more pools and alliances in order to reduce competition. Some owners will simply say they cannot continue and will sell up. And we will see insolvency as some of the larger players find they have over-extended their debt, while some of the smaller, family-owned enterprises will be forced out of business by their bankers.

In turn, this will lead to bond defaults as owners cannot repay the mortgages on the ships, and this will put further pressure onto banks and financial institutions that are already hard-pressed with extensive shipping portfolios, none of which are generating profits. Ships will end up on the second-hand market, but there will be few buyers. The value of those assets are constantly decreasing, and we have seen examples in which ships that were built for 40 million two years ago have just changed hands for 25 million. That represents colossal depreciation.

In summary, in the short term we expect to see further consolidation, mergers and pooling. In the medium term, we envisage tonnage/supply reaching equilibrium by 2015. And in the long term, much will be determined by the world economy, political situations and lastly but not least, the cost of bunkers.