Stolt-Nielsen sees weak chemical tanker next three years

Despite the current upticks in the chemical tanker market, this development is far from permanent, says Stolt-Nielsen Limited. It will be 2018 before the pressure begins to wear off, the company's Vice President of Corporate Finance tells ShippingWatch.

Photo: Stolt-Nielsen

The tale of too many ships and too little cargo is starting to become more than familiar in the shipping industry, and the chemical tanker market is far from nearing the final chapter. Even though the sector is currently experiencing improvements, this development does not represent a lasting trend, Jens F. Grüner-Hegge tells ShippingWatch.

He is Vice President, Corporate Finance, at Bermuda-based Stolt-Nielsen Limited, which through carrier Stolt Tankers is a major player in the chemical tanker market.

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"In our view this development is very temporary, because if one takes a look at the orderbook, it is extremely large over the coming years, and we're not seeing sufficient volumes. This is a consequence that dates back a few years, from when the orderbook was very little, when there was cheap capital available and significant capacity at the yards. Many players had the same idea at the same time and joined the wave of orderings," he says.

Stolt-Nielsen published its first quarter interim report a month and a half ago, which featured the low fuel price at Stolt Tankers as a significant factor behind an improvement from USD 18.6 million in the same period 2014 to USD 38.7 million this year. Today the bunker price has stabilized at a low level, so that the gradual improvement the carrier noted in the first quarter will be smaller in the coming quarter, explains Jens F. Grüner-Hegge, pointing to the biggest challenges going forward:

"For Tankers, a key challenge is definitely to deliver an acceptable return in the current market environment. The many new ships increase competition, and to get through this we need to secure our own costs and operations, in order to be as efficient as possible."

Stolt-Nielsen and Sungas divesting shares in gas giant

This is not a new drill  at Stolt-Nielsen, which - like numerous other industry players - in recent years has been working with cost reduction efforts in light of the traditionally high bunker price.

"We're constantly reviewing our organization and our sailing pattern. A big challenge for us is the significant amount of time we're spending in ports, and improving our port rotation time represents a key ambition for us, something we're working with our terminal business to improve in order to give the ships a faster turnaround in the ports," he says.

Numerous chemical tanker vessels are currently sailing around empty, and it will not become easier to secure cargo in the years to come. A large number of new chemical tankers will enter the fleet next year, creating further pressure. The same scenario applies to 2017.

"So it's difficult to see a real improvement in the market before 2018," says Jens F. Grüner-Hegge.

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He also believes that the market - with the influx of private equity funds and the ensuing access to fresh capital - has helped change the structure of the market. With companies working solely as tonnage suppliers, the chemical tanker market is now also home to operators with nothing at stake beyond fees and running the ship:

"This creates a split between the owner and the charterer in terms of profits, and this is not a healthy structure for our industry. It creates a mentality of booking cargoes at all costs, regardless of the freight rate, and this is not good."

Even though the market prospects do not look set to change anytime soon, the Stolt-Nielsen group, led by the three biggest units Stolt Tankers, Stolthaven Terminals and Stolt Tank Container, has delivered positive results for 425 consecutive quarters - and the company is working to continue this development, says Jens F. Grüner-Hegge.

Funds could drive consolidation

In order to make the chemical segment a good business again, new collaborations or a form of consolidation is necessary, said Laurence Odfjell, chairman of the large Norwegian shipping group, recently. Odfjell is currently struggling to get back on track in market characterized by a vast oversupply of ships.

And the private equity funds, who - according to numerous market players - have helped build the massive overcapacity of vessels through their willing capital, could be a driving force behind this consolidation, says Jens F. Grüner-Hegge.

Last year the group's CEO, Niels G. Stolt-Nielsen, directly criticized the many new orders in chemical tanker that were possible with the private money from equity funds and hedge funds. The funds no longer constitute the same dominant problem, explains Jens F. Grüner-Hegge. The damage has been done, as he says.

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"We have been very worried about this in the past, but the damage is done and now we need to handle the situation as it is today. I don't see a lot of new capital entering the market, as returns going forward will be less solid due to the orderbook," he says, adding:

"They (equity funds) have discovered that the possibility of getting in and scoring a quick payoff is no longer available. A number of them are probably feeling a little stuck, and I think we'll see some consolidation among players looking to reach a size where they can become listed on the exchanges, and in this way the private equity funds could get away from this."


In relation to the recent annual reports, analysts have pointed out that Stolt-Nielsen's view on the chemical tanker segment is too bleak, with Platou stating in a comment on the latest interim report that the orderbook is far from as big as the carrier claims. But Stolt-Nielsen is just being realistic, he says.

"If one looks at earnings in the chemical tanker market, realism has defeated optimism, and we're not making money by being optimistic. We need to be realistic and handle these risks and the reality we face. So far our view on the market has been correct. Even if we'd wish it wasn't the case," he says.

As such the other business units also play a part in maintaining the positive results. And the major orderbook do not keep the company from ordering from ordering new ships itself:

"We actually ordered vessels in 2012 and we have a newbuilding program of five vessels plus one through a joint venture. There are expansions, and we also continue to expand in the terminal business. Tank Container and Seafarm are also still growth areas in our business."

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Stolt-Nielsen, one of the owners in gas collaboration Avance Gas, which bets on the major VLGC vessels, also entered a new LNG joint venture last year. Alongside SunLNG and LNGaz, Stolt-Nielsen considers investing in a project aimed at a new LNG logistics service in Canada over the next four years.

"We expect to be ready to make a final investment decision later this year or in early 2016. This could become a new growth area for the company," says Jens F. Grüner-Hegge.

Divesting shares in Avance Gas

Stolt-Nielsen along with another partner, Sungas Holdings, announced plans on Friday last week to divest part of the carriers' stakes in gas collaboration Avance Gas, according to a statement issued to the Oslo Stock Exchange, which informed that the two parties "are exploring the opportunity to sell up to 5.0 million common shares" in Avance Gas. The two companies own Avance Gas together with Frontline 2012. If Stolt-Nielsen manages to sell 2.5 million shares at USD 16.2 per share, the sale will release a gross figure of USD 40 million, thus improving the company's liquidity, which came to USD 50 million at the end of the first quarter, noted analysts Fearnley in a comment on the impending share sale.

Low bunker price boosts Stolt-Nielsen in Q1

Stolt-Nielsen worried about the tanker market

Stolt-Nielsen takes a beating on the Oslo Stock Exchange

Odfjell: Carriers must take responsibility for the crisis 

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