Asia Clean Tanker Market Outlook Q2 2017: Overcast Skies Ahead
Amidst the backdrop of expected fleet growth of 4% in 2017, the product tanker sector in Asia is likely to face a set of challenges in Q2. Peak cracker turnaround season, the ramping up of new condensate splitters in the region as well as petrochemical endusers substituting more naphtha for LPG in the cracking pool are expected to lower naphtha flows into Asia in Q2, which are the bread and butter of Long Range tanker demand. The naphtha-fed steam cracker turnaround season in Asia is expected to hit its peak in Q2, with an average of 2 million mt/year of capacity likely to be offline in Japan, Singapore, South Korea and Taiwan. A widening propane-naphtha discount and plunging butadiene prices have prompted steam crackers in Asia to consider switching to LPG as petchem feedstock, with two to three end-users including Formosa heard to have purchased LPG for May delivery.
As new condensate splitters in South Korea and Taiwan begin ramping up utilization rates over Q2, increased regional production of naphtha may displace some flows to Asia, resulting in less cargo movements and taking a toll on LR tanker rates. Hyundai Chemical’s 130 kb/d condensate splitter came online in Q4 last year, while trial runs at CPC’s 50 kb/d condensate splitter are expected to begin in May. Strong blending demand for naphtha in the West as summer driving season approaches has also rendered the Europe to Asia arb unworkable, diminishing demand for LR tankers along the key Med-Japan route.
Owners may find brief respite in end-April when the fixing window for 1H May cargoes emerges. Heavy refinery maintenance in South Korea and Japan had the short-term impact of raising spot purchases for 1H May delivery. Asian petrochemical end-users purchased at least 715 kt of spot naphtha for 1H May delivery, around 59% higher than that of 2H April, which may help to lend some support to LR tanker rates. Another bright spot for LR tankers lies in a seasonal increase in gasoline blending demand for heavy naphtha, which has a higher yield of aromatics.
As for the Medium Range (MR) segment, lower cargo flows into and out of China are likely to weigh on tanker demand and subsequently freight rates. A widely-anticipated Chinese consumption tax imposed on mixed aromatics and light cycle oil imports is expected to take place sometime between May and July, leading to a scramble by buyers to cancel cargoes as reported by Reuters. Details such as the exact date of the tax levy remains unclear. Over January-February 2017, China imported around 928 kt of mixed aromatics and 351 kt of light cycle oil each month on average. The impact of the tax will likely be seen in reduced imports of mixed aromatics and light cycle oil which typically move in MRs from Southeast Asia and South Korea respectively.
The planned Chinese consumption tax is part of a government mandate to regulate surging product exports. Increasing imports of the two blendstocks has lengthened the domestic surplus considerably, leaving refiners with no choice but to raise exports of the finished grades of gasoline and diesel in recent years. As such, the consumption tax is likely to restrict further growth in product exports from China. Heavy refinery maintenance in China is also expected to dampen product exports in April, with 1.4 mmb/d of capacity offline.
Source: OFE Insights