INSIGHT: Surging freight rates hamper Asia petrochemical trades

SINGAPORE (ICIS)–A severe shortage of containers and vessel space as commercial ships take a much longer route to avoid the Red Sea has sent freight rates skyrocketing in recent weeks, artificially propping up petrochemical prices even as demand remained generally weak.

• Some sellers offer on free on board (FOB) basis but no takers
• Freight costs for Chinese exports more than double
• India may suffer near-term shortage of select petrochemicals

Across markets in Asia in recent weeks, industry players’ lament boils down to this exasperated hyperbole: “The freight rates are killing us!”

It takes the fun out of witnessing some initial signs of recovery in external demand for global manufacturing giant China.

Whatever export competitiveness Asia gained from having weaker currencies against the US dollar is being undermined by the high cost of shipping out of the region.

The Chinese yuan recently fell to a six-month low, while the Japanese yen continues to trade at multi-year lows against the US dollar, which is firmly supported by higher-for-longer interest rates.

Overseas demand for Chinese products, including petrochemicals, seems to be improving, but actual trades are being hampered by logistics woes stemming from the Red Sea crisis in the Middle East.

Attacks on commercial ships have continued in the key shipping lane that connects Asia to Europe, the latest being on an oil tanker bound for China.

Rerouting of ships to the Cape of Good Hope meant longer voyage times and much slower turnover of vessels and containers, thereby, creating a strong pressure on freight rates, which may persist for most of the year.

“The race for capacity appears to have started, with shippers showing strong demand due to shippers moving significant cargo in the first four months of 2024 to avoid potential Q3 constraints​​,” Richard Fattal, chief commercial officer of London-based freight forwarder Zencargo said in a note on 20 May.

“Combined with an average of 5% ongoing blanked sailings, there is a looming future of tighter capacity, higher rates and sellers’ market swings ahead,” he said.

“With capacity shrinking in the face of resurgent port congestion, driven by equipment shortages in China and longer routes around the Cape of Good Hope,” Fattal said.

For Q2, Zencargo is projecting more than a 13% contraction shipping capacity on the Asia-Europe routes compared with Q3 2023, “with alliances cancelling 5% of sailings between weeks 20 and 24 [H2 May to H1 June]”.

“The effective capacity to Northern Europe, based on actual vessel departures from Asia, has decreased by 5.1% compared to a year ago,” it said, citing “the longer route taken by the majority of vessels via the Cape of Good Hope, despite a 17.8% increase in vessel capacity on the Asia-North Europe route”.

For the Asia-Mediterranean route, however, the overall capacity has “increased by 10.5%, even with the diversions via the Cape” due to a 49.1% increase in total deployed capacity on this route compared to a year ago”, Zencargo said.

WEST BUILDING WALLS AGAINST CHINA TRADES
The July-September period is the peak season for Chinese shipments to the west, ahead of the Christmas season in December, according to Wang Guowen, director at Shenzen Logistics and Supply Chain Management Research.

Possibly driving up US’ overall demand for Chinese goods, which exerts upward pressure on shipping costs, is the impending tariff hike on imports of selected products from China, including electric vehicles (EVs) and battery materials.

For Chinese EVs, the US import tariffs would quadruple to 100% from 1 August, which is tantamount to a ban.

European countries appear to be considering similar protectionist measures against China, whose overcapacity is deemed to be killing domestic industries in the west.

“Western countries’ implementation of tariffs and tax structures on Chinese-manufactured automotive and EV exports is anticipated to significantly impact the shipping sector by potentially reducing vessel demand,” online container and leasing platform Container xChange said in a recent note.

To bypass these trade barriers, Chinese automotive and EV makers “are accelerating efforts to internationalize their manufacturing, assembly, and distribution processes”, it said, adding that “immediate effects are already evident, as manufacturers are hastening to ship EVs to avoid impending tariffs and uncertainties”.

In the global petrochemical scene, manufacturing facilities in the US and Europe, as well as in parts of northeast Asia are shutting down amid China’s overcapacity.

Technically, reduced production elsewhere would open up new markets for China’s excess capacity, if not for the surging freight rates, which further deter trades while demand recovery remains fragile.

China’s overall exports have remained soft, posting low single-digit annualised growths in three of the first four months of 2024, with one month in contraction.

HEADACHE FOR INDIA PETROCHEMICAL IMPORTERS
Petrochemical end-users in India are facing long waiting time to get their hands on imports from China.

“Now, no shipping lines will confirm fresh Q2 shipment booking, even after dishing out quotes that are three to four times higher than Q1,” an India-based styrene butadiene rubber (SBR) importer said.

A phenol trader said: “June vessel arrangements are more troublesome this year because of the Red Sea issues and also China’s exports have been weak especially in the past two months, so fewer vessels are being arranged to China.”

India is possibly facing a near-term shortage of purified terephthalic acid (PTA), since northeast/southeast Asian suppliers are struggling to export to the south Asian market.

Freight rates from both Taiwan and Thailand to India nearly doubled from April, with voyage time for some shipments taking as long as 90 days, up from the usual 30-40 days.

For polyethylene (PE) and polypropylene (PP), cargoes from the Middle East heading to the south Asian markets of India and Pakistan are also being delayed, amid congestion at the ports of Salalah in Oman, Dammam in Saudi Arabia and Jebel Ali in the UAE.

For polymeric methylene diphenyl diisocyanate (PMDI) of northeast Asian origin, offers to India have spiked amid tightened regional supply, with delays in getting cargoes from South Korea.

SURGING SHIPPING COSTS KILLING SPOT TRADES
Spot petrochemical trades are being stalled by constantly changing freight rates on a weekly basis.

In the polypropylene (PP) market, some Chinese suppliers have stopped offering on a cost, insurance and freight (CIF) basis, and will only offer on FOB basis because of the risks.

For the China-to-Vietnam and the Vietnam-to-Indonesia routes, freight rates have nearly tripled, market players said.

Buyers are less willing to discuss on an FOB basis, unwilling to shoulder an expected high cost since most of them do not have their own regular shipper.

For soda ash, offers of Turkey-origin dense grade cargoes for 1,000-tonne lots to southeast Asia for Q3 shipments rose to around $300/tonne CFR, up by $20-30/tonne compared with May shipments.

Importers of the material across Asia were largely staying on the side lines, with some of them experiencing delays in receiving Turkish cargoes.

“Discussion levels are firming up due to freight costs,” said an end-user, adding that the “Red Sea issue is getting worse and lots of shipments from Europe and USA are stuck.”

The same is true for the southeast Asian PE market given delays in arrivals of Middle East-origin cargoes and amid perceptions of shorter supply.

In the oxo-alcohols markets, producers in Asia are under strong pressure to offload cargoes at lower prices given difficulty in moving volumes to their usual export outlets.

Freight rates on chemical tankers are also on the rise amid the Red Sea crisis, sources from Asia’s monoethylene glycol market, resulting in postponing of cargo-loading by some producers.

“The freight rates are quite high now, and we have to optimize our vessel availability,” a major MEG producer said.

FURTHER FREIGHT SPIKES LIKELY IN JUNE
H2 is typically “a busier, more competitive, and profitable season for the shipping industry”, with many container sellers are “currently holding onto their inventory” in anticipation of better demand, said Christian Roeloffs, co-founder and CEO of Container xChange, in a note in May.

“In an environment of heightened market volatility and encouraging demand recovery for global trade, container traders are gearing up for the second half of 2024, where we expect a cyclical rise in demand,” he said.

“This combination of heavier-than-expected demand for freight and anticipation of further demand surges in the second half of 2024 is driving up container trading prices in China,” Roeloffs added.

In a recently conducted survey of container traders and leasing companies by Container xChange, it noted that a majority of the respondents reported “extremely high prices for 40 ft high cube containers in China”.

On 21 May, the average one-way leasing rates quoted in the market rose to as high as $2,480 for 40 HC in China for US-bound shipments, more than double the rate at the start of the month at around $950, it said.

With ceasefire between Israel and Palestinian militant Hamas in Gaza proving elusive and the threat of a wider Middle East conflict still hanging, it looks like high freight rates are here to stay for an extended period.

Insight article by Pearl Bantillo

With contributions from Nurluqman Suratman, Fanny Zhang, Nadim Salamoun, Judith Wang, Helen Lee, Ai Teng Lim, Samuel Wong, Julia Tan, Izham Ahmad, Jackie Wong, Shannen Ng, Helen Yan and Clive Ong