There can be no doubt about it, China is now one of the world’s chemical cluster powerhouses. The country’s industrial and manufacturing might will soon be matched by its rapidly advancing chemical clusters, further driving its transition away from lower skilled labour intensive professions towards advanced, high value exports. The global geopolitical uncertainty and trade tensions, which are now returning with a vengeance after a cool down period at the turn of the year, look set to become a hugely important market driver in the chemical market and chemical tanker segment across the short, medium and long-term. While much of the focus often remains on the flow of crude oil, the sanctioning of crude oil tankers and the internal and international politics of oil producing states, the complexity and centrality of numerous chemical supply chains to the global economy cannot be understated and deserves perhaps far more attention than it currently receives. It is nigh-on impossible to take the chemical products and tanker section as a homogenous market but the recent political posturing is certain to impact a number of market segments and some of those will be explored in greater detail in the writing.
The Sars-Cov 2/ COVID-19 crisis has highlighted to many the effectiveness, missing links, requirements and challenges associated with the supply chains for many products across almost every sector of the economy. The social, political and economic fallout of the policy responses to the coronavirus have already led to shifting trade flows and a rebalancing of both producers and consumers. These changes will be further exacerbated and manipulated by the rising trade and geopolitical tensions between certain important global actors, namely China, the United States and Iran.
Firstly, Let’s take the example from the most recent July edition of the DynaMarkets Monitor relating to Polyethylene and the potential for large scale investment by China in Iran’s petrochemical and transport infrastructure. In recent weeks, Chinese demand for polyethylene has remained resilient despite the further restrictions placed on Iranian vessels under the US sanctions regime. Iran is a key source of the chemical for Chinese importers and manufacturers and therefore remain very exposed to any increase in the scope or severity of the sanctions. It has been reported that up to six vessels were unable to enter Chinese ports in recent weeks for fears of contravening the sanctions, leaving them in a difficult trading environment. While direct imports may be hampered, it is thought that an increasing number of cargoes could be heading to China via ship-to-ship transfers conducted in South East Asia, thus evading the ever stricter sanctions. More generally, it is understood that today around 15% of Chinese polyethylene imports come from Iran, the equivalent of around 16.7 million tons. While there has been a dip in the Ira-China trade, this is not expected to be long-term, especially if the reported USD 400 billion investment deal is finalised, a deal which includes 280bn of direct investment in the chemical cluster and a further USD 120 billion in associated logistical and transport infrastructure.
While Iran could grow to be a crucial Chinese partner for this trade, among others, as China’s ever more confrontational stance in the international political environment causes division with other nations it is unlikely to be the sole beneficiary and other geopolitical flare ups could further reorient Chinese imports to other suppliers, including other Belt & Road Initiative participants. The recent flare up in relation to the disputed border region between China and India provides a stellar example as the divisions will mean a likely knock on effect to other key chemical trades including paraxylene, sulphuric acid, benzene and ethylene glycol. It has been reported that China will shift some of its imports of paraxylene from India to South Korea. In the second quarter, China imported some 414,000 tons of paraxylene from India but this number is set for a 40% decline, equivalent to some 124,000 tons in the third quarter. The resulting oversupply in India is expected to put downward pressure on prices while the falling demand for shipping services will likely result in falling freight rates on the MEG/ West Coast India to China routes in the short term, with a more entrenched rerouting of cargoes possible in the longer term.
With China continuing to become more and more assertive in its international politics, it is possible that those states with a closer affiliation with the West, and with the US in particular may seek to limit, where possible, their exposure to potential sanctions. While the BRI is now encountering some difficulties as numerous participants are seeing elevated borrowing and economic hardship emanating from the coronavirus crisis, it still represents a massive market dominated by China. If the BRI develops into a more comprehensive trading bloc with integrated supply chains linking the participant countries, the current chemical supply chains may have to adapt at a faster pace than many expect.
In terms of what this means for the chemical tanker market, as has been seen in the crude and product tanker market, the importance of knowing your counterparty and knowing your vessel will take on ever greater importance. There has been a significant increase in the amount and the effectiveness of efforts to disguise the true beneficial owners of vessels and their former trading history. Evidence can be taken from the case of Iran and Venezuela but the risks associated with chemical tankers could be set to level up if some of the aforementioned developments were to come to pass.