05-04-2018

Shipping Q1: Asia clean MR tankers stay steady, VLCCs off to shaky start

In the tale of two East of Suez tanker segments, all the excitement centered on the clean product tanker market during the first quarter of 2018, while the dirty market languished since the beginning of the year due to supply side concerns.

The inherently resilient nature of the clean tanker market was once again on display with freight levels experiencing recovery intermittently during Q1, while a contrasting trend was witnessed in the dirty segment.

Moving into Q2, both segments are seeing signs of positivity with clean tankers expected to find increased employment opportunities to ferry refined products due to refinery turnarounds, while dirty tankers are expected to find tonnage balance due a spike in demolition activity.

CLEAN TANKERS — SHINE IS ON MR VESSELS

Market participants say price outlook for clean tankers can be a tad stronger on the back of upcoming refinery maintenance across the region. During turnarounds, demand centers may import more cargoes from elsewhere, resulting in greater deployment of product tankers and thereby boosting earnings.

The outlook for the MR tankers is more positive compared with the bigger LR1 and LR2 vessels. The recent refinery maintenance period in South Africa saw a spike in demand for MRs to move refined products there from the Persian Gulf.

Demand and supply fundamentals are now strong for MR owners and there are more options in terms of routing cargoes, according to Gernot Ruppelt, who is Ardmore Shipping’s chief commercial officer. There are plenty of opportunities to move refined products on long-haul routes such as from the Middle East to Europe, North Asia and Africa, he said.

In the LR segments, the surplus supply is troubling owners. “There are way too many ships among LRs, while the additional demand that was supposed to come for [loadings] in India hasn’t happened,” Ralph Leszczynski, head of research for Banchero Costa said.

Daily earnings on LR2s plying on the benchmark Persian Gulf-Japan route are currently around $10,000/day compared with $6,000/day in the week ended March 23, an increase of 67%, though from a lower base, according to broker estimates. In March, it briefly touched almost $15,000/day.

During Q1, for prolonged phases the earnings on this key route were less than $5,000/day, which barely covered operational expenses. Owners are hoping for incremental demand, such as significant surplus for exports in China in Q2, to cover costs.

In 2015, more than 130 MRs and almost 100 LRs were ordered, while last year the corresponding number was around 40 MRs and under 10 LRs.

The fleet of product tankers has expanded by 5%-6% in the last three years due to strong deliveries and low demolition, but a slowdown is now expected, Leszczynski said. Banchero Costa projects a fleet growth of 3% this year.

DIRTY — BETTING ON DEMOLITION

In the dirty tanker market, demolition has taken prominence as freight levels had dropped substantially since the beginning of the year.

The first quarter of the year was lackluster with the freight variances staying rangebound within 20 Worldscale points for the key routes out of the Persian Gulf and Indonesia regions.

The VLCC, Suezmax and Aframax segments have been suffering from tonnage oversupply and a slight drop in demand due to the large stockpiles of both crude and oil products that are yet to be consumed.

However, the Asian VLCC market saw change as chartering began for April loading, with fixture rates rising above w40 for PG-Japan on March 20 for the first time since end-January.

Sources attributed the firmer market to a pickup in chartering activity out of West Africa.

Moving into the second quarter, market participants do not expect a significant change as historically it is a seasonal lull due to refinery maintenance.

“We have already seen a short period of bullish market, but starting from end-April there will be the seasonal demand decrease and there are a number of newbuilding deliveries scheduled for Q2 as well, especially since OPEC is still holding on to their production reduction,” a charterer source said.

In the Asian Suezmax tanker segment, some higher rates were achieved by owners for cargoes loading from Kharg Island due to a limited pool of vessels available for such business. But other PG-loading cargoes continued to see an ample amount of vessel choice for charterers.

Sentiment remained under pressure on Aframaxes from the heavy utilization of older units by charterers, which kept competition tight among owners with modern well-approved vessels in both the Persian Gulf and Indonesia regions.

Almost 20 VLCC tankers were heard sold for demolition so far this year, however only eight of those vessels were seen to be beached at a scrapyard or en route to a scrapyard on S&P Global Platts trade flow software cFlow.

Even a four-year high for demolition or scrapping of older ships was not enough to prevent the freight market from stagnating, as the dirty tanker fleet grew by 5.1% and that of product tankers by 4.2% last year, according to Bimco’s chief shipping analyst, Peter Sand.

Demand for tankers is not very strong and is expected to grow by 2%-3% this year, while the fleet is projected to grow by around 2.5% as well, he said.

VLCC owners are currently earning less than $14,000/day on Persian Gulf-North Asia routes, according to broker estimates. This is a far cry from end-2015, when they were earning close to $100,000/day.

“During 2015-16, when crude prices were on the lower side, importers were purchasing and transporting crude not only for consumption but also for building stocks,” Leszczynski said.

Now it is the reverse. As crude prices have recovered, importers are dipping into cheaper inventories, he said.

Consumption has not declined, but the use of inventories implies a slowdown in growth, Leszczynski added.

The global fleet saw the addition of 94 crude tankers, while 129 vessels were placed on waters in 2017, according to Banchero Costa estimates.

Last year, over 100 new dirty tankers were ordered, of which almost half were VLCCs. As this supply comes on stream, it will add to supply pressure.

Source: Platts

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