After a hiatus of almost three months, the East of Suez Long Range II or LR2, were commanding upon Worldscale points, a puny premium rate over the Long Range I or LR1, as tight supply and strong demand for the bigger ships had resulted in the reversal of freight differentials, says, market participants.
The trend is significant because the LR2s typically enjoy a discount of 15-20 Worldscale points over the LR1s on the benchmark Persian Gulf-Japan route, which is dominated by naphtha trade flows. The latest reversal could force charterers to split their cargoes in order to ship them on ships of smaller sizes.
Charter’s interest on capital
The economies of scale prompted several charterers to snap up LR2s for last week, in some instances even including the smaller MR cargoes. While the charterers capitalized on the discount, rates moved up sharply, eroding the entire discount within a span of a few days.
On Monday, both LR1s and LR2s on the key PG-Japan route were assessed by S&P Global Platts on par at w115 each. Industry sources said that at least two LR2 fixtures on this route had been done above this level.
Cheaper than LR1
For all of this month, the LR2s were very cheap and many charterers preferred to take them,” a chartering source in Japan said.
Two weeks ago it was more than $4/mt cheaper to move cargoes on LR2s compared with the LR1s on the Persian Gulf-Japan route, Platts’ data showed. The discount LR2s commanded over the MRs was even wider at around $6.50/mt, the data showed.
On the one hand, combining of MR cargoes kept the rates of smaller ships under check, while on the other it had pushed up the LR2 rates.
Among the latest fixtures, an Adnatco LR2 ship was taken by ATC at w117.5, market sources said. There is a possibility that the cargo will be co-loaded in the Persian Gulf and Vadinar, a port where length overall, or LOA restrictions disqualified many ships, prompting the suitable ones to seek a premium.
However, loading ports for the fixture were still not finalized, sources said.
LR1 rates frozen
“The choice of clubbing MR cargoes into LR2s may no longer be viable,” said a source with an MR owner. The LR1 rates were mostly unchanged around w115, while LR2s have gained a significant w20 over the last five trading days. The latest LR1 fixture Wednesday had also been done at this level, market sources said.
“The LR1 rates are stuck for a long time. It is strange that they did not move an inch,” a source with an LR owner said.
Abu Dhabi’s Adnatco managed to get a ship on the Ruwais-Haldia route at w135, which was around w5 points higher than the PG-Singapore rates, basis 55,000 mt cargoes.
No back cargo at East Coast of India
Market sources said that this points towards soft-to-stable LR1s because typically owners seek a larger premium for delivering cargoes in East Coast India to cover their cost of ballast.
Unlike Singapore and North Asia, where there was a possibility to get backhaul cargoes, in East Coast India owners have no option but to ballast elsewhere in the quest for their next employment.
Double the earnings
Daily earnings on the PG-Japan route in the LR2 segment had more than doubled to around $12,000 in the past two weeks, market participants said. Earnings for the LR1s continued to languish with minor changes during the period around $7,500, they said.
Upside was limited for LR1s because there were enough ships available, a broker in Singapore said. There were owners with multiple ships to offer around the same laycan.
Look for smaller ships
With LR2s now becoming expensive, charterers will shift to smaller ships, another source with an LR owner said.
“Loadings in the third decade of June will see a split of cargoes,” a source said and also added that this could push up the LR1 rates from where it is struck now.
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Source: Platts
