Chemicals Update: High, higher, highest – Is there an asset bubble forming in the Chemical Tankers sector?

The historically strong market for chemical tankers from the past 2-3 years has naturally created excitement and strong bullish sentiment among shipowners. And there is nothing wrong with that – shipping is a cyclical business and a boom like the current one was long overdue.

But looking at recent deals for time charters, second-hand purchases and new buildings can leave the more cautious ones scratching their heads, trying to make sense of it all. When already stretched valuations start increasing by 5-10% per month, one gets reminded of an asset bubble. So is this the case with chemical tankers?

According to Ray Dalio, one of the most renowned and respected hedge funds managers, a bubble market has a combination of the following characteristics in high degrees:

1. High prices relative to traditional measures of value

Current vessel prices and time charter rates have increased more than 50% compared to their 10-year averages – and still, there is further upward pressure due to expectations related to inflation and stricter environmental regulations.

2. Many new buyers are attracted because the market is perceived as hot

In the past year or so, a lot of new players—without prior experience or knowledge in the chemical market or shipping—have placed orders for new ships at historically high prices, betting that the rates will remain high or go even higher over the life of the asset (20 years or more). As these new buyers are eager to take part in the rally, they pay higher and higher prices, propping up the market even more.

3. Broad bullish sentiment

Some expectations among owners is that the market will remain strong for at least another year or two. They believe that in the long term, tougher environmental regulations will mean high costs and low / negative fleet growth, which will support the rates.

4. A high percentage of purchases being financed by debt

This is the default mode of operation in shipping, where banks commonly cover 50-60% of a newbuilding’s value.

5. A lot of forward and speculative purchases are made to bet on price gains

If one expects prices to continue going up, then buying at today’s prices makes sense. But with current prices already more than 50% higher than the long-term average, it is doubtful that they will keep rising for much longer. Here comes to mind the law of reversal to the mean or put in simple terms – what goes up, eventually comes down. There is no reason chemical tankers should be any different.

6. Unsustainable conditions

“Past performance is no guarantee of future results” is a common warning in the financial services industry, which seems appropriate in this case as well. Paying sky-high prices for second-hand or new tonnage, while expecting the unusually strong returns from the past 2-3 years to continue for the next 10 or 20, is a recipe for a financial disaster.

The attractive earnings, currently enjoyed by the owners, have little to do with the supply and demand for chemical shipping per se. Both international trade in chemicals and the chemical tanker fleet have grown only modestly, and if it were not for politics and wars, rates would have been flat – but longer voyages led to a tight market, high fleet capacity utilisation and high rates.

With owners full of cash, it was inevitable that some of that money went into ordering new ships—in some cases, a lot of them. The orderbook for chemical tankers stood at about 6% of the existing fleet at the beginning of the year and by now, has reached 9%, while the existing fleet itself has expanded by about 2.5%. Meanwhile, the product tankers orderbook for ships 10-59,999dwt has swelled to about 15% of the existing fleet. To put this in perspective – the new deliveries of product tankers in 2025 will be one ship every three days, and in 2026 – one ship every two days.

Where will all these product tankers be employed? OPEC and IEA both recognise that the demand for crude oil and oil products is gradually dropping. This is likely to be a long-term structural trend driven by rapid expansion of renewable energy production and demand, coupled with slow economic growth in all major economies except India. The new refineries, Dangote in Nigeria and Olmeca in Mexico, will add more volume of refined products, but the effect of this on the tankers market may be not as good as some may expect. And when the oil products market suffers, it inevitably impacts the chemical tanker market.

The chemicals market itself may be poised for gradual but sustained slowdown in transport volumes. Increased biofuel mandates in Indonesia, Brazil and other vegoil-producing countries will remove a few million tons of cargo from the international market from next year onwards. Lower production due to climate change will further constrict the supply. Sulphuric acid flows will also be reduced, as domestic capacity in both India and Indonesia will substitute imports, while possible shutdowns of smelters in China will limit the available supply of sulphuric acid.

Part of the fleet will have to retire, but with a long-term average scrapping age of 23-24 years and a historically strong market, there may be a lot less scrapping than expected. Overcapacity in steel production and slow economic growth in China will mean depressed steel prices, which will further disincentivise owners sending ships for demolition. Regulatory pressure is likely to result in the gradual phase-out of older, more polluting vessels, a process that will take at least a few years to complete.

With these criteria in mind, it appears an asset bubble may be forming in the chemical tankers segment and we are now somewhere between the boom and euphoria stages. The latter marks the peak of the bubble and is followed by profit-taking when it becomes apparent that values cannot grow anymore and the smart money, heeding the warning signs that the bubble is about to burst, starts selling and taking profit. That may already be happening, as over the past several months there have been some spectacular sales of 10-year-old vessels fetching the same amount of money as newbuildings, or second-hand tonnage capturing almost double what it was worth for it 3-4 years ago.

With an expected weaker chemical market in the next year or so, owners who have bought at the peak will suddenly see themselves owning assets with diminishing earnings potential. This will likely trigger the last stage of the asset bubble – the panic when asset prices reverse course and descend rapidly. Investors and speculators, faced with obligations which they cannot cover, will want to sell at any price – a good opportunity for more conservative companies that have saved their cash and restructured during the early stages of the bubble.

By Plamen Aleksandrov, Head of Research – Chemicals, SSY.