Fallout from Ukraine: Chemical flows largely unscathed

In March’s issue of this Newsletter, we discussed the immediate implications on chemical flows and the chemical tanker market from Russia’s invasion of Ukraine and suggested that the initial impact was relatively insignificant. Now that the invasion is more than seven months old, in this issue, we re-examine chemical flow shifts and whether there has been a larger impact on chemical tankers.

Flows largely unchanged. In March we stated that any sanctions placed on Russia could potentially include methanol, butadiene, orthoxylenes and olefins which are some of Russia’s major chemical exports. However, no sanctions or embargoes have been imposed so far on Russian chemicals which has helped to maintain their flows. Indeed, shipping data suggest that they continue to oscillate around their pre-invasion levels. The only measures that have been taken so far are the imposition of measures by the EU, UK and US against several firms in Russia’s energy sector who also produce chemicals or chemical feedstocks plus numerous Russian banks. The upshot of these measures has that it has become tougher, although not impossible, for Russian firms to export their products across the world.

No eastward shift. Data also indicate that as well as maintaining absolute export levels, Russia has also managed to broadly preserve its customer base with the US and Europe still large buyers of Russian chemicals since many of these are not classed as energy products. This is a very different picture to that seen with oil flows where, at least in the case of crude oil, there has been a massive eastwards shift as India and China have upped their Russian imports. Although China and India are occasional importers of Russian chemicals, volumes remain small. Nonetheless, there remains the possibility that chemical flows could shift moving forward. Russia and Europe are now firmly engaged in an energy war as western governments attempt to put pressure on Moscow and vice versa. Any expansion of this new ‘cold war’ could see the EU (and likely the US and UK) decide to embargo many more Russian products than today, potentially including chemicals. However, assuming that the US and Europe were forced to search for alternatives to replace Russian chemicals, we believe that the impact on chemical tankers would be slight due to the small volumes involved. Indeed, this would be far away from the significant shifts seen in refined product flows and tanker markets which have helped to support MR tanker earnings and thus draw swing tonnage away from the chemical tanker pool of late.

Russian-linked tanker fleet developments. One shift which has been seen over the past seven months, is the disappearance of Russian flagged ships from EU, UK and US ports following the introduction of bans from these administrations. However, shipping data suggest that the same tankers have largely been carrying Russian products to EU, UK and US ports, although they appear to have been re-flagged. Furthermore, the Russian-linked chemical tanker fleet has contracted by two units over the past seven months so it now number 33 units for a combined 190,000 Dwt.

Biggest potential impact still to come. As stated above, the EU and Russia appearing to be embarking on an energy war. We believe that this will have the greatest impact on chemical flows and therefore the chemical tanker market. This hypothesis is based on the soaring cost of natural gas which threatens to erode the economics of chemical plants in Northern Europe (where Russian pipeline gas is a significant energy source) which rely on natural gas as a feedstock. Indeed, not only do we project extremely high natural gas prices over the coming months, but we anticipate regular supply disruptions. Such a scenario threatens to see some plants shutter either temporarily or potentially even permanently. If this was to be the case, we believe that it would impact both chemical tanker demand into and out of Northwestern Europe. However, this could boost chemical tanker demand in other regions, notably the Mediterranean and the Middle East as plants there strive to make up for disruptions in Northern Europe.