Europe's Future in Chemical Production: How Will This Impact The Chemical Fleet?

The European Petrochemical Association (EPCA) meeting in Vienna late last month saw the industry come together at the nexus point between a very challenging 2023 and the uncertainty awaiting the market in 2024. In this report, we will focus on some of the key topics that were under discussion, and how these will impact the chemical tanker sector in terms of tonnage demand and trade flows next year.

For many European chemical producers, the outlook for 2024 is bleak. With the Ukraine conflict pushing up regional energy costs in 2022, this has seen domestic operating rates scaled back to unsustainable levels. These dropped as low as 57% in July 2023 according to industry data, and the current destocking cycle has led to a downturn in demand that will likely see capacity rationalisation to rebalance the European market.

The soaring energy costs and squeezed margins opened Europe up to a wave of imports from 2022 onwards, as capacity growth in other regions forced these suppliers to seek out new avenues amid the economic uncertainty. Europe had already been drifting into a larger net import position over the last decade—the last 18 months simply accelerated the process.

Overall, there was a 6% rise in specialised products imports into Europe compared to the previous year—drilling down into different sectors, the increase is far more pronounced. Ethanol imports into Europe soared by 62% compared to 2021, while Asian caustic fixtures into Europe and a surge in UAN imports from the US and Trinidad pushed up inorganic volumes by 73% year on year.

We also saw chemical imports from the US grow by 22% last year compared to 2021 – largely driven by glycols and other ethane derivatives, as well as a doubling of methanol volumes.

Chemical imports for 2023 are likely to be steady compared to 2022, and overall specialised products imports into Europe are poised to drop this year, but this is due to the slump in demand amid the pressures of inflation and the cost-of-living crisis rather than a recovery in European output.

If we see the continued decline of European chemical production, it leaves Owners with limited opportunities for a backhaul into the East of Suez markets or over to the US Gulf. The Europe to Far East trade lane has been static for some time now, with contractual volumes steady and no real incentives for Owners to go on berth.

Fleet efficiency will take centre stage next year as the environmental regulations mandated by the EU and the IMO come into force. Cost exposure will vary depending on the different routes, but shipping will invariably become more expensive across the board. Higher freight costs will create a more challenging environment for arbitrage economics, but this will also mean that the cost-advantaged production hubs in the US and the Middle East have more scope to make it work.

How the cost impact of environmental regulations will shape the European import profile is unclear so far. On paper, it would be the Middle East that faces a lower cost on the ETS simply by virtue of its proximity to the EU in comparison to Asia or the US, but the phasing in of the ETS means that the overall costs will take some time to be fully realised.

In the meantime, it is in Asia where we see the greatest growth on liquid bulk chemicals over the next few years—close to 40 million tonnes of new capacity is scheduled to come online between now and 2026. With around 75% of this based in China, the current fears of deflation and an extended period of economic stagnancy amid the structural pressures of growing unemployment and the housing sector downturn could see more of this volume being pushed into the global market.

For further information about trends in the chemical market, speak to an expert in our Specialised Products team.

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