Archives for posts with tag: oil product

Shipping plays a major role in the world’s industries, facilitating the transport of large volumes of raw and processed materials. However, the maritime sector forms a much more important part of the global supply chain for some commodities and industries than others. Comparing world seaborne trade in a range of cargoes to global production helps to make this abundantly clear.

Still In The Limelight

Looking at a range of cargo types (see graph), less than 50% of global production of each was shipped by sea in 2015, with a significant share of output consumed domestically. However, seaborne transport still accounts for a sizeable proportion of many of these cargoes, and a wide range of factors influence the level of dependence on shipping of each.

Compelling Cues

One obvious driver is the location of production and consumption. Crude oil is the commodity most reliant on shipping, with some 46% of crude output last year exported by sea, with oil output concentrated in a relatively small number of countries. Similarly, around 41% of global iron ore production was shipped last year, with limited domestic demand in key producers Australia and Brazil. Absolute and relative regional productivity also has an influence. Just 15% of coal output was shipped in 2015, with half of the 6.5bt of coal produced globally last year output in China, nearly all of which was consumed domestically. Still, China was the second largest coal importer in 2015, with regional coal price arbitrages driving trade.

Another key factor is the availability and efficiency of other transport modes. Twice as much natural gas is exported via pipeline than in a liquefied state by sea, with just 9% of natural gas output in 2015 shipped as LNG. Meanwhile, the level of processing of materials also has an impact. Oil and steel products are less reliant on shipping than crude oil and iron ore, with refineries and steel mills often built to service domestic demand.

Raising The Drama

However, the growth of ‘refining hubs’ has raised the share of refinery throughput shipped by almost 10 percentage points since 2000. This kind of trend is an important driver of shipping demand. The share of output of the featured commodities shipped rose from an estimated 22% in 2000 to 26% in 2015, generating c.720mt of extra trade. This equates to an additional 1% p.a. of trade growth, boosting trade expansion to a CAGR of 3.7% in 2000-15. Trade in some cargoes is more sensitive to shifts in the share of output shipped than others, but across the featured cargoes, a further change of 0.5% in the share of output shipped could create another 130mt of trade, 2% of current seaborne volumes.

No Sign Of Stage Fright

So, while trade in even the cargo most reliant on shipping accounts for less than half of global output, the world economy today is still dependent on the seaborne transport of 11bt of all cargo types. Overall growth in production and the distance to consumers are also clearly important demand drivers for shipping, but for the world’s industries there’s no denying the main part that shipping still plays in the supply of raw materials. Have a nice day!

SIW1243 Graph of the Week

While the expanding role of Asia (especially China, see SIW 1132) in seaborne trade has grabbed headlines in recent years, developments in the US, still the world’s largest economy, have also had a significant impact. In a short space of time, changes in the US energy sector have dramatically altered global trading patterns in a number of commodities, significantly impacting the pattern of volume growth.

Putting On A Spurt Of Energy

For much of the last three decades, US oil production has been in decline, falling on average by 1% a year since 1980 to a low of 6.8m bpd in 2008. Yet technological advances have since led to huge gains in exploitation of ‘unconventional’ oil and gas shale reserves. In the space of just six years, the US managed to raise oil output alone by an astonishing 60% to almost 11m bpd, a new record.

Making An Oil Change

This has led to huge changes in US energy usage and import requirements. Crude oil imports have almost halved since 2005, and since 2010 have fallen on average by 11% p.a. to 260mt last year. Exports of crude oil from West Africa in particular have had to find a home elsewhere (unsurprisingly, many shipments now go East). Since US crude exports are still banned, US refiners have taken advantage of greater domestic crude supply to produce high volumes of oil products, especially for shipment to Latin America and Europe. Lower US oil demand since the economic downturn has also contributed, and seaborne product exports reached 120mt in 2013, up from 70mt in 2009. Alongside global shifts in the location of refinery capacity and oil demand growth, these trends have transformed seaborne oil trade patterns.

The impact could be similarly profound in the gas sector. As US imports of gas, mostly LNG, have dropped (on average by 34% per year since 2010), plans to add up to nearly 100mtpa of liquefaction capacity by 2020 could mean the US eventually emerges as a major LNG exporter, potentially accounting for 15% of global capacity (from 0.5% currently). Meanwhile, LPG shipments are continuing to accelerate strongly, rising by more than 60% y-o-y so far in 2014 to 6mt.

Miners Under Pressure

There has also been an impact in the dry bulk sector. Lower domestic gas prices have pushed the share of coal in US energy use to below 20%, leaving miners with excess coal supplies. US steam coal exports jumped to 48mt in 2012 from 11mt in 2009, contributing to lower global coal prices (cutting mining margins) and higher Asian import demand.

So What Next?

So the effects of the changing balance in the US energy sector have been far-reaching, and there remains scope for more shifts to occur as trade patterns continue to adjust to changes in commodity supply and prices. While the firm pace of expansion in US oil and gas output may start to slow, any change to existing export policies could have further impact. What is clear already, in terms of seaborne trade growth, is that the focus has shifted away from US imports, for decades a key driver of the expansion of global volumes, towards the country’s developing role as an energy exporter.

SIW1135

SIW1077“Field of Dreams” is a film about the crazy things sane people do. Kevin Costner plays a farmer who hears a voice telling him to build a baseball field on his farm. “If you build it, they will come”, it says. So he stops farming and builds the field. Initially it’s the bailiffs who come, but then mysteriously the field fills with old-time baseball heroes, so all is well. It’s an inspiring, if fanciful, movie

Field of Faith

There is a parallel between Costner’s single-minded (or mindless?) commitment to his ludicrous dream, and the conviction shipping investors must have. Logic says the chance of a new Capesize making serious money in the near future is about the same as Babe Ruth sauntering out of Kevin’s cornfield. But the whisper “if you build them they will come” is not always ludicrous. A previous Analysis article argued that containership investment makes its own market because, once the ships are there, the cheap transport ‘pump primes’ new trades. So boxships are candidates for shipping’s “Field of Dreams”, and maybe products tankers are too.

Make Ships, Make Money

Oil products are different from most bulks because they are semi manufactures. Refineries churn out vast quantities of many different products, and matching refinery runs to global demand is a challenge in which shipping in-vestors now play a big part, as the trade data shows.

For many years products trade grew slowly. Between 1964 and 1973 it rose by 2.7m bpd, but in the next decade to 1983, there was no growth. By 1993 it had edged up another 1.8 m bpd, but generally owning products tankers was a dull business. Then every-thing changed. Babe Ruth came sauntering out of the cornfield and since then trade has doubled.

New Player, New Game?

Change on this scale demands an explanation, and there are several. One is the growing importance of the non-OECD countries. Thirty years ago the OECD economies, with their 7 oil majors, dominated trade. But today the non-OECD countries dominate and their diversity creates more product imbalances. Another development is the entry of oil traders into the shipowning and chartering business. In the 1990s traders discovered that if they had ships as well as cargo, they could earn a ‘double dip’ margin on the trade. Trading cargo because you’ve got the ship turned conventional logic on its head and expanded the framework of products trade.

Home Run or Just Run?

So there you have it. The trade surge has made products the doyen of the languishing tanker business, as proved by the 290 tankers 10-60,000 dwt on order. It’s an interesting pitch, but the challenge of understanding the subtle movement of diverse oil product cargoes is tough for traders and nearly impossible for analysts. Like Kevin Costner, it’s just a matter of following the voice and hoping that when you build the ships, the new trades will come. Sleep well and have a nice dream.