For the Asian dirty and clean tanker markets, 2018 was a mixed bag that saw a fragile start but only to end on a fairly strong footing, while 2019 is expected to be a year of waxing and waning.
The Very Large Crude Carriers after struggling to meet operating expenses for most part of the year registered an impressive revival in earnings, which averaged around $12,000/day from Q1 to Q3 to over $50,000/day in Q4.
It will be challenging to sustain the late burst witnessed in the VLCC market into 2019 given that the oil cartel, OPEC, will cut crude exports by 1.2 million b/d along with an expected delivery of 70 newbuildings amid a weakening global economy, according to a market source.
The boost for the market, however, could come from VLCCs going in for scrubber retro-fit for complying with the IMO 2020 sulfur cap, which essentially would see five to ten VLCCs taken out of the market for 10-15 days, according to market watchers. A scrubber is a gas cleaning system that removes particulates and gases such as sulfur dioxide from a ship’s exhaust.
The cargo supply side could look healthy as two new refineries belonging to China’s Hengli Petrochemical Group and Zhejiang Petrochemical Corporation, with a total annual capacity of 40 million mt, are expected to start commercial operations this year.
China, whose crude demand is expected to grow by about 592,000 b/d in 2019, is set to raise the crude import quotas for its independent refiners by 42% this year, according to Platts data.
The strong demolition activity during 2018 compared with the previous year had helped boost the earnings on the VLCCs, Federica Sani, a Genoa-based senior tanker analyst with Bancosta said.
VLCC scrapings trebled to more than 30 last year, and ensured a slower growth in fleet at around 3% in 2018, compared with 5% and 7% in the previous two years, respectively, the data showed.
There was a heavy slippage in VLCC deliveries in 2018 with only 39 vessels delivered compared with 50 in 2017, according to the Bancosta data.
Associations such as Bimco feel that the torrid pace of scrapings seen in 2018 cannot be sustained.
As earnings improve, owners will lose interest to scrap, Bimco’s Copenhagen-based chief shipping analyst Peter Sand said. There was a sudden reversal of fortunes for owners in October, but market fundamentals do not change so fast, he said.
The tanker markets’ outlook will be determined by geopolitical factors including the trade protectionism in US and China, the sanctions re-imposed by US on Iran and political uncertainty of countries like Venezuela and Libya, Sani said.
Stronger demand for US light sweet crude grades in Europe will boost demand for Suezmax and Aframax tonnage, while deliveries to Asia will benefit the VLCCs, she said.
CLEAN TANKERS – IMO2020 MAY BOOST DISTILLATES TRADE
Clean tankers’ freight rates have increased significantly in the recent weeks with Long Range I daily earnings rising to a five-year high above $20,000/day in December. Most analysts expect the rates to sustain this year in not only the LR1s, but also the Long Range II and Medium Range tankers.
Following 18 months of challenging market conditions, the tanker markets have started to rebalance and have the cyclical trough in the rear view mirror, according to Jo Ringheim, an Oslo-based research analyst with Arctic Securities.
The East of Suez Long Range tankers had their best month in terms of earnings for owners in December, and the momentum is expected to be carried forward to early this year with owners looking forward to more demand as the world gears up for increased trade in low sulfur fuels.
Arctic Securities has forecast daily earnings of around $20,000/day and $17,000/day this year for the LR2s and MRs, respectively.
It is not one, but many factors at play, which is supporting the LR tankers market,” a senior chartering executive with a global commodities trading and refining company said.
Around 20-25 LR2s turned dirty late last year, which is close to 7% of the global fleet, and therefore a sizable number. Addition of such numbers into the Aframax fleet, which is already large, does not make a sizable difference for the dirty rates, but significantly tightens the supply of clean tankers.
Also several LR2s got employment in China, where the refineries were keen to use their annual export quotas in time. Typically, the intra Far East trade out of China is dominated by the MRs, but this time a large demand for LR2s delayed their return to the Middle East for their next employment.
Tightening the availability of LR2s had also helped some ten LR2 vessels storing gasoil around Taiwan during Q4 2018.
The upcoming IMO regulations on sulfur fuels will lead to increased distillate trade and amplified volatility in product prices, which are factors that should bode well for product tankers, UK-based research analyst with VesselsValue, Court Smith, said.
The ton mile demand for clean tankers’ is still robust as price movements have encouraged arbitrage, Smith added.