Data Intelligence For Chemical Parcel Tanker Ship Finance

Ship Finance has been difficult in the last few years resulting in many banks withdrawing from the market.  However, shipping assets have remained profitable for several investors, albeit risky in a negative climate.  Recently we have also seen major players stepping back into the market such as Deutsche Bank and HSH Nordbank.

Investment decisions in shipping are not easy since they involve huge amounts of capital, rely on the performance of counterparties, and have multi-year commitments. Ship Finance uses vessel charter fees as the principal source of repayment and mitigates risk with various forms of collateral structured around shipbuilding and charter agreements.

When market conditions are in a boom, we see a lot of new investors entering to get a share of the opportunity.  Such herding phenomena have often resulted in too much investment and overcapacity. Nevertheless, there are still parties who like to enter the ship finance space when the market is bad, such as the investment interest we have seen from China.

Those purchasing and investing in ships must be able to justify their decision and create better value for their stakeholders.  They need to have a good understanding of the current state of the market versus vessel asset prices.

Therefore, the key to making profitable decisions in ship finance is good intelligence into what drives the industry.

Short and long-term freight cycles

In the chemical parcel tanker freight market, there is a short-term seasonal cycle and a long-term economic boom and bust cycle.

Market sentiment is normally softer during the summer months and firmer during wintertime when the sector’s parcel tankers also carry clean petroleum products reducing space availability for chemicals.

It’s, however, more difficult to predict long-term boom and bust cycles.  Boom times in the industry are depicted by an increase in demand for trade that increases the demand for tonnage, which is supported by Ship Finance.  This leads to an increasing order book during market up-cycles, resulting in an oversupply of vessels, which in turn ushers in the next market down-cycle.

The freight rate environment in the tanker market has often been due to shipowners themselves who continued ordering vessels during boom times with the support of banks.  Often freight level declines have been attributed to excess tonnage that has flooded the market rather than a shortage of cargoes.

Monitoring fleet growth against economic activity is also important. Are new vessels replacing an older fleet or are they being added to the existing fleet?  The price of steel and vessel age restrictions, which are imposed by oil and chemical majors, impact scrapping and demolition decisions and thus also fleet growth.

Various other market dynamics play an important role.  There is the US moving ahead as a major petrochemical producer on the back of shale gas or the growth of the middle class in Asia that is starting to consume the materials they produce instead of exporting them, for example.  Other conditions that impact the market can include a black swan event, new regulations, mergers and acquisitions, changes in the sizes of ships, and shifting of fleets to other sectors or regions.

Increasing protectionism and an escalating trade war between the USA and the rest of the world, the US withdrawal from the Trans-Pacific Partnership, or the renegotiation of the North American Free Trade Agreement also create uncertainty.  Another risk factor is a potential conflict, such as on the Korean peninsula or in the Middle East.

Conclusion

Getting access to data intelligence will allow players to take part in fleet growth opportunities at the right time in the market cycle. It is important to take an in-depth look at freight markets, focusing on the underlying trends in each trade lane, freight rate developments, product flows, bunker prices, spot fixtures, time-charters, and S&P transactions, as well as industry and market news, plant outages, new projects, and global economic developments.

Also read our article: The Importance of Tank Terminals in Tanker Shipping.

Photo Credit: Sean Pollock on Unsplash