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Daily Briefing November 3 2017

China Merchants chairman is positive on oil demand - but don't expect any big VLCC orders, yet

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China Merchants chairman is positive on oil demand - but don't expect any big VLCC orders, yet

 

CHINA Merchants Energy Shipping, the tanker and bulker unit of state conglomerate China Merchants Group, foresees sustainable growth in crude oil shipping, with plans to strengthen and expand its fleet.

Despite the shift to clean energy, fossil fuels will remain as the main energy resource in the foreseeable future and will have a stable increase in demand, CMES chairman Su Xingang tells Lloyd's List in an interview.

At the same time, China's appetite for such commodities will continue to grow as the country's economy expands, Mr Su adds.

China imported 8.5m barrels per day of crude oil for the first nine months of 2017, up 12.2% from the year-ago period, according to customs data.

The statistics were followed by a BIMCO report that expected the industry to require about 45 more very large crude carriers to meet that rising demand.

Cosco Shipping, another Chinese state giant, has already this week unveiled an order for 14 tankers, including four very large crude carriers at Dalian Shipbuilding Industry Corp.

Mr Su, however, is reluctant to put a number on the VLCCs that he wants to add into his fleet. "We don't have a specific target about the size of the fleet, it'll depend on our development strategy."

The remarks come after Xie Chunlin, the president of CMES, told Lloyd's List in May that 53 VLCCs were not enough to satisfy the company's ambition.

Through a 51-49 joint venture, China VLCC, with its sister company Sinotrans & CSC Holdings, CMES currently operates 43 very large crude carriers on the water, with 10 more vessels on order.

But Mr Su says the board of CMES has not been considering placing big tanker newbuilding orders at the moment, as the crude shipping market is expected to remain oversupplied in tonnage over the past two to three years.

Another reason for the restraint on ordering is that CMES is currently undergoing asset restructuring, Mr Su adds.

CMES, a listed company in Shanghai, is set to enjoy the full ownership of China VLCC, as part of the merger plan revealed recently.

Mr Su says the consolidation of equity stakes will make the decision-making process more efficient.

It can also unleash the full potential of CMES's listing status when it comes to fundraising for further development of its VLCC fleet.

The merger, which is still pending approvals from government regulators, will see the company led by Mr Su acquire several Sinotrans & CSC's shipping units, which operate in break bulk, ro-ro and container shipping sectors.

In addition to the VLCC business, the company currently operates five aframaxes, eight valemaxes, seven capesizes and eight ultramaxes, plus 20 valemaxes and four ultramaxes sitting on its orderbook.

While the diversification will help CMES alleviate cyclical risks, the company will do a screening of its business portfolio after the acquisition deals are complete, according to Mr Su. "We'll make sure that the 
resources will be poured into the sectors we deem as promising," he says.

Full story


 

Top stories:

A quarter of all oil refining capacity could be lost by 2035 as a result of emissions regulations

FALLING demand for oil amid restraints on carbon emissions could result in 25% reductions of today's global refinery capacity by 2035, a new report found, potentially affecting tanker trades and bunkering fuel patterns.

The study conducted by independent financial think tank Carbon Tracker is predicated on the Paris Agreement's vision of a maximum 2¯C increase in temperature compared to pre-industrial levels. It sees demand for oil peaking in 2020 and then declining by potentially 23% over the next 15 years. This drop would lead to a 50% decline in global refinery earnings compared to 2015's $147bn.

Carbon Tracker analysed 492 refineries, which account for 94% of global capacity, according to the think tank.

The report comes as the shipping industry struggles to nail down a strategy to proceed with its own path to decarbonisation and is also bracing for the introduction of the 0.5% sulphur cap in 2020 that has caught unprepared refineries and operators alike.

However, the burden will not fall evenly on all refineries.

Carbon Tracker identified a number of refineries that are likely to keep operating even at a loss for various reasons. These include, among others, those located, in India, China and that are operated by state-owned enterprises as well as in oil rich countries. Furthermore, if a refinery is the only one in the country, it is also likely to remain functional at a loss.

Refineries located within Organisation for Economic Co-operation and Development countries are therefore the most likely casualties, due to these regional imbalances in demand and the operation of non-profitable refineries.

Full story

The ICS wants a ban on fuels ahead of sulphur cap

THE International Chamber of Shipping has called for a ban on the bunker tank carriage of all fuels that do not comply with the incoming 2020 fuel 0.5% sulphur cap, a few months before global regulators begin work on a successful implementation plan.

The ICS, which represents over 80% of the global merchant fleet, said it would table a concrete proposal to the International Maritime Organization in 2018.

After firmly establishing that the sulphur cap will indeed come into effect in 2020 without a transitional period, the IMO is tasked with fleshing out a number of details, such as the smooth introduction of the cap, fuel availability, compliance and enforcement. The IMO's Sub-Committee on Pollution Prevention and Response will begin addressing these challenges  in February 2018.

As regulators mull their options, commercial feedback reveals a race against time and foreshadows the very real possibility of a period in which compliance is elusive; refineries and operators have recently expressed concerns about their respective capability to cope with the cap.

Full story


  

Analysis:

Why LNG shipping firms love preferred shares

PREFERRED shares have suddenly become a big hit with shipping companies specialising in the transportation of liquefied natural gas.

Capital-thirsty LNG shipping companies, particularly master limited partnerships, have found in preferred shares a "fixed-cost" alternative to common equity that does not dilute common shareholders.

Is this phenomenon a one-hit wonder or are preferred shares here to stay? Can that strategy be replicated in other sectors of the industry?

LNG master limited partnerships have been very active in capital markets because they have large drop-down backlogs that need to be absorbed. After a lacklustre 2016 in the broader energy MLP sector, capital markets have again opened and MLPs are rushing to make up for any ground lost.

The most obvious example is GasLog Partners, which has acquired three units in 2017 compared to just one in 2016.

Golar LNG, Teekay LNG, Hîegh LNG and GasLog Partners have raised a total of $514m since May 2017. The same four companies raised just $246m in common equity year to date.

It appears that LNG MLPs have this year relied on preferred equity more than they have relied on common equity.

This is remarkable for a source of capital that is typically treated as an afterthought, more like a quirky form of debt that is disguised as equity.

Preferred shares, however, offer some several advantages. They represent a permanent source of equity that is not subject to periodic amortisation like bank debt. They do not dilute common shareholders. Preferred dividends stay fixed over time. They are also a diverse source of capital, with most buyers of preferred shares being "buy-and-hold" retail investors, unlike institutional investors that typically buy common shares.

But the best advantage of all may be that they come at the right price. Recent issues pay a preferred dividend of 8.5% to 9%. The presumption is that LNG MLPs can make an accretive new vessel acquisition financed with preferred equity, among other sources.

New vessel acquisitions allow LNG MLPs to serve their two key constituencies, the parent company, which acts as the sponsor or general partner, and their common unit holders or limited partners.

The parent company, which essentially uses the MLP as its fundraising arm, monetises its early investments and raises funds to develop new projects.
Limited partners, on the other hand, have the expectation that new vessel acquisitions will result in higher dividends. GasLog Partners, for example, has raised its dividend, or cash contribution, four quarters in a row.

The secret to keeping the two constituencies happy is the word "accretive". If a vessel acquisition can be structured so that its return on investment is higher than its cost of capital, it is an accretive acquisition. If preferred shares come at a reasonable cost they will have a prominent presence on the balance sheet.

The key to replicating this strategy to other shipping sectors is cash flow visibility. For example, Seaspan and Costamare from the containership sector, Tsakos Energy Navigation from the broader tanker sector, and shuttle tanker specialist Knot Offshore have issued preferred shares.

In summary, preferred equity is a credible alternative source of capital for companies with visible cash flows. Depending on cost it has the capacity to gain prominence in a chief financial officer's toolbox.

Full story


 

Opinion:

Shipping's 'health-ometer'

INDUSTRY-watchers like to use a number of metrics to gauge the health of shipping. The Baltic Dry Index is one; the world idle fleet another.

This month, we take a look at another indicator: shipyards, which are in the frontline of any improvements or declines in industry health.

Shipyards are in a precarious position. A strong orderbook should be good for business; more ships means more work. But too many orders can tip the fleet balance into a glut and, as we have seen for the past seven years at least, that can lead to a prolonged curtailment of orders.

It is a vicious cycle that gets repeated again and again.

This time, Chinese competitiveness has added an extra dimension. Government-backed banks and leasing houses that underwrite orders at Chinese yards have undercut the market so effectively that nearest rivals South Korea and Japan cannot hope to compete.

Instead, they continue to focus on high-technology ship designs such as liquefied natural gas carriers and floating production storage and offshore vessels, which can be built at a premium.

This strategy is paying off, to some degree. Due to limited newbuilding orders and delayed deliveries, South Korean yards have increased market share with more orders this year, while Chinese yards have retreated.

Last year, South Korean shipyards made almost the same money from fewer orders than their Chinese rivals. That could be repeated this year.

At end-August, South Korea had booked 374 vessels for a value of $54.7bn, compared with China's 1,352 vessels at $58.4bn.

But for how long this can continue remains to be seen.

Tougher financing conditions on South Korea, part of the OECD, means owners must fund more of the orders themselves.

Now China is clamping down on its leasing houses funding orders at foreign yards, which will make it even harder for Korean and Japanese yards to compete.

Unless owners are willing to continue to pay a premium for shipyard quality and technical expertise, it could be a very quick race to the bottom.

Our report also takes a look at the other end of the vessel lifecycle: shipbreaking.

With more vessels expected to head to breakers' yards in coming years, ahead of environmental regulations, the spotlight on beaching will shine bright.
We ask, will the Hong Kong Convention make a difference to this practice, and is the EU Ship Recycling Regulation a lame duck?

Full story


 

Markets:

Engie is about to deploy an FSRU off Tianjin to meet Chinese winter LNG demand

ENGIE has been contracted to provide CNOOC with liquefied natural gas regasification and storage services off Tianjin in the coming months, signalling strong demand for LNG from China this winter.

The French energy major, formerly known as GDF Suez, said it would deploy the floating storage and regasification unit GDF Suez Cape Ann from its fleet to serve this contract for a period from October 28 to spring 2018.

The move comes as China, the world's third-largest LNG importer, is increasing overseas purchases this year in efforts to switch to cleaner energy, offering support to the recovering LNG shipping markets. China imported 25.6m tonnes of LNG in the first nine months of the year, up 43% on year. Australia and Qatar provided most of the supplies.

Full market report

India's petcoke ban presents opportunities for bulker owners

A BAN on petcoke usage in four Indian states from November 1 this year is likely to have a positive impact on dry bulk shipping in the short term, especially for the panamax and supramax segments.

The Supreme Court of India has prohibited industrial use of petcoke and furnace oil in national capital regions because of environmental concerns.

Following the ban, petcoke - a vital component in producing cement - has to be substituted with thermal coal, creating opportunities for bulker owners.
If the ban is extended to the whole of India, which is expected to happen very soon, the nation would require additional imports of around 30m tonnes of coal annually.

Full market report

Data Hub: Global trade growth should come in at around 6% this year as the Americas boost figures

PRELIMINARY projections for the peak season of 2017 show annual growth of approximately 6% for global trade (excluding intra-regional flows) with the full year now expected to see a growth of a similar magnitude.

Exports from Latin America to have increased by 5% during the second quarter of 2017 and are projected to increase 6% during the third quarter of 2017. A higher growth rate is estimated in the opposite direction, with an increase of 9% for the second quarter of 2017.

Full market report


 

In brief:

Increased LNG spot earnings help boost GasLog's third-quarter results

LIQUEFIED natural gas carrier owner GasLog has reported a strong third-quarter profit as the New York-listed company pointed to rising LNG market prospects.

For the latest quarter, GasLog posted a $24.2m profit, contrasting with a loss of $16.4m in the same period last year. Third-quarter revenues increased by 8.7% to $131.2m, a record for the company, partly as a result of two new deliveries in the interim, but also due to increased revenues yielded by the spot market.

Full story

US Navy report cites crew errors for warship collisions in Asia

THE US Navy has blamed human error for its part in the collisions which separately damaged the USS Fitzgerald and USS John S McCain and led to the deaths of a total of 17 sailors on board both warships.

"Both of these accidents were preventable and the respective investigations found multiple failures by watch standers that contributed to the incidents," said Chief of Naval Operations Admiral John Richardson, adding that, "we must do better".

A US Navy report said the collision between the USS Fitzgerald and ACX Crystal off Japan's coast on June 17 was due to small errors that built up over time, leading to a lack of compliance to standard navigational procedures. As for the USS John McCain, which collided with Alnic MC on August 21, the accident was mainly attributed to "complacency, overconfidence and a lack of procedural compliance".

Full story

Crowley inks sale and leaseback deals for three ExxonMobil tankers

CROWLEY Maritime's tanker unit Crowley Alaska Tankers has inked an agreement to acquire three tankers from an ExxonMobil subsidiary, SeaRiver Maritime, and charter them back to the seller under multi-year contracts.

Although prices for the transaction were not revealed, according to VesselsValue, the vessels have market values of roughly $133.4m, $139.7m and $17.9m, respectively. This amounts to $291m in total.

Full story

Swiber mulls switch to FLNG business to stay viable

SINGAPORE-listed Swiber Holdings, which is under judicial management, is looking to enter the floating liquefied natural gas vessels business as it attempts to successfully undergo restructuring.

Swiber has inked a term sheet to acquire a 100% stake in Australia-based Interlink Power & Energy Holdings from founders Davind Ingrames and Stephen Thurstans.

Full story

Genco posts wider loss amid impairment charge

NEW York-listed Genco Shipping & Trading posted a $31.2m net loss for the third quarter of 2017, wider than the $27.5m net loss in 2016, despite higher revenues as an impairment provision weighed.

Revenue for the quarter rose to $51.2m from $38.9m in the year-ago period as most of the company's vessels saw higher spot market rates, though further gains were mitigated by the lower number of vessels in operation.

Full story

Ghana close to choosing an operator for new bulk terminal

GHANA is close to appointing an operator for its new dry bulk terminal at Takoradi port, a key hub in the country's growing bauxite trade.

Ghana's overall dry bulk exports have quadrupled since 2000 to some 4m tonnes, almost all of it minerals and ores. For bauxite, exports may reach about 1.4m tonnes, up from 1.1m tonnes in 2016 and just 427,000 tonnes in 2010.

Ghana trails Guinea, though, which is Africa's champion in terms of bauxite shipments, expected at 25.3m tonnes this year.

Guinea has now become the single largest exporter of the commodity, overtaking Australia, with two-thirds of the output moving to China, according to Banchero Costa.

China has been investing heavily in African resources and infrastructure and exports from Ghana are also being targeted, anticipated to boost longhaul trade in time. A $10bn project is being proposed to develop the West African nation's bauxite industry. 

Full story

 

 

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