Greener pastures in liquid storage over tanker shipping

The storage industry has experienced solid growth since 2004. The financial meltdown of 2008 brought it very minimal pain. Vopak is the major independent storage operator. Stolt and Odfjell have storage subsidiaries to offer full service to their clients and strengthen their balance sheet. Others like Oiltanking are part of a trading company group (here Mabanaft).  Storage is a growing market that is part of global supply chain logistics.

The storage market benefits from four major global trends:

• Geographical imbalances between product and consumption.
• Countries setting individual specifications for products.
• Liberalization of previously closed economies.
• Growing demand for biofuels fuels.

Large multinational groups like Vopak operate terminals globally in a variety of countries. Vopak is in both the oil and chemical storage business. The oil storage business is driven by distribution needs. For example, Russian oil products are transported in smaller ships to a hub location (Rotterdam) where they are sent to the Far East in larger vessels. Vitol, a major oil trader, is building a storage facility in Cyprus as a hub for Russian Black sea production to be exported to other locations. Likewise Middle East oil products to be distributed in the Med.

The rising trend in country regulations setting individual specifications for products has been an Eldorado for this business since this creates rising demand for local blending before products can be distributed in the market place. Environmental regulations calling for greater use of biofuels have also been a boon to the storage industry with the rise of ethanol blending in motor gasoline.

One of the biggest future drivers for this business should be the Middle East refinery facilities and the shift to product of oil products and chemical feedstock at source. Production at source allows very competitive product prices for export. Whilst these facilities have been targeted for export to Far East emerging markets, there are also export opportunities to Europe and the US. Equate, a Dow-Kuwait joint venture, has been exporting ethylene glycol to the Mediterranean for some time now. The product and chemical sectors may be in the doldrums from tonnage overcapacity, but the products still need to be discharged in storage tanks.

Chemical storage is more oriented toward industrial production needs. Vopak experienced in 2009 a sharp reduction of chemical storage volume in their European chemical division, but this was made up globally by rising demand in Far East emerging markets.

The largest share of storage is booked on a fixed rental basis, providing stable income flow not subject to volume fluctuations. A large share of contracts (40% for Vopak) are long term (over four years). This trend is especially strong in Far East emerging markets. This provides stable cash flow to amortize the large capital investment in new storage facilities. Returns on capital in this business often exceed 20%.

Whilst volatility and timing can create great opportunities in the tanker market, this creates much higher risks in a capital and labor intensive business. The storage business has provided better returns over time with less risk. For major chemical parcel tanker operators like Stolt and Odfjell, their storage divisions have assisted them in providing for more stable financial results.