Trump Tax Plan Holds Uncertainties For Product Tankers

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Includes: SEA
by: Lloyd's List

Summary

MR tankers face choppy waters from Trump proposal.

US Gulf exports may benefit from tax cuts.

But importers could be hit, and trade war worries loom large.

MEDIUM range product tankers saw near double-digit erosion in earnings in the Atlantic basin over the past week, despite receiving support from a flurry of fixtures to Latin America that has seen growing product imports from the US Gulf.

However, in recent weeks, and especially since Donald Trump's appointment as US president, oil and tanker markets have been expecting a shake-up in the crude and product flows from the US on account of a radical border tax adjustment plan.

This is important because of the scale of US product exports.

The US has developed as the world's largest petroleum product exporter, accounting for 19.3% of global exports in 2015, as US refineries have benefited from cheap and abundant domestic crude production, according to Banchero Costa.

"Record high refinery runs and increased global demand have boosted US exports of petroleum products, up 12% and 10% in 2014 and 2015 respectively," it said.

Subsequently, MR tanker traffic has surged for US product exports to South America and Central America, with 69.1m tonnes and 32.9m tonnes respectively. Exports to northern Europe, the traditional buyer, were 36m tonnes.

One of the priorities of the Trump administration is to implement a corporate tax change, which also comprises a border adjustment that excludes exports from taxes. This is designed to benefit net exporters and penalize importers, due to which there will be a significant re-channeling of oil to and product flows from US Gulf refineries.

What is relevant for product tankers is that the refiners will be heavily incentivized to sell product overseas, potentially boosting product exports to record levels.

Another important scenario that could play out is a trade war where a neighboring country such as Mexico, which trades heavily with the US, decides to implement its own import taxes. This will backfire for US refiners as Mexico is the single largest importer of US oil products, but could be a windfall for MR tankers as tonne-miles increase.

US Gulf Coast refiners would have to substantially reroute their product flows and Mexico would end up importing more products from Europe or Asia, thereby incurring higher transport fees, energy consulting firm JBC Energy said. "Besides European and Asian refiners, the big winner in this scenario would be the clean freight market as tonne-mile demand would surge," it said.

What complicates product flows in Latin America is that Mexico is in the process of implementing its own gasoline price reforms.

In 2016, Mexico began deregulating fuel imports and removed the monopoly of Petróleos Mexicanos, or Pemex, allowing other companies to import gasoline and diesel and open retail stations. It continues to open its fuel markets to outside competition and replace government-set prices with market-based ones.

"Based on US and Mexican data sets, US gasoline exports accounted for 80% of all Mexican gasoline imports and provided an average of 47% of Mexico's gasoline consumption during the first 10 months of 2016," the US energy department said.

In turn, over the past five years, US exports to Mexico accounted for between 44% and 54% of total US gasoline exports.

The US Gulf MR tanker trade will depend on how the changes on both sides of the border pan out and whether a trade war materializes. Meanwhile, shipbrokers said there continued to be strong demand for short haul deliveries to the east coast of Mexico and the Caribbean, and even inquiries for long haul shipments to Latin America.

Latest US oil inventories data showed gasoline and distillates inventories posting strong supply build-ups despite a slowdown in refinery activity, making exports to Latin America increasingly viable.

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