- Freight for the 270,000 mt VLCC US Gulf Coast-China route has so far averaged $11.4 million in December.
- Sulfur bunker costs in the Americas were obscured by a historic 165% spike in VLCC US Gulf Coast-China freight amid geopolitical tensions.
- The short-lived spike elevated rates to a higher floor at lump sum $9.5 million from pre-spike levels of $7.9 million lump sum.
According to an article published in Platts, Americas clean and dirty freight rates have risen so far in December and are expected to climb into the first quarter of 2020, reflecting the costs of new low sulfur bunker fuel regulations due to take effect January 1.
VLCC rates rapidly decrease
VLCC rates typically begin a downward trajectory starting in late November. But this year rates have steadily climbed starting in mid-November and into December. Freight for the 270,000 mt VLCC US Gulf Coast-China route has so far averaged $11.4 million in December, up from $11.1 million in the second half of November and $10.2 million in the first.
The VLCC market has acted as a freight fortuneteller for the smaller dirty and clean tanker markets going into 2020 upon the January 1 implementation of the International Maritime Association’s 0.5% sulfur bunker regulation.
The first signs of the tanker trade pricing in 0.5% sulfur bunker costs in the Americas were obscured by a historic 165% spike in VLCC US Gulf Coast-China freight amid geopolitical tensions, including drone attacks on Saudi oil infrastructure and sanctions on COSCO Shipping Tanker (Dalian), at the end of the third and the beginning of the fourth quarter.
Reduction in sanctions on Iran and Venezuela
Also boosting prices in October were a reduction in available tankers due to US sanctions on Iran and Venezuela.
Ultimately, the short-lived spike elevated rates to a higher floor at lump sum $9.5 million from pre-spike levels of $7.9 million lump sum right around the time when VLCC charter parties started pricing in 0.5% sulfur bunker fuels. VLCCs typically fix tonnage 15-45 days in advance and hence require careful planning to capture compliant fuel cost that ranges $265-$295/mt over high-sulfur bunkers, S&P Global Platts data showed for the ex-wharf Houston market Tuesday.
Ships with scrubbers naturally have a higher earnings potential as they run on lower-priced high-sulfur bunkers.
Shipbroker reports show that this week alone, VLCC time charter equivalent earnings for tankers using VLSFO have been yielding $80,000/d, or 78%-86% of earnings on scrubberized VLCCs for the USGC-China voyage. Shorter voyages have been commanding less of a spread between the two means of compliance, with non-scrubberized Aframaxes on the Caribbean-USGC route making closer to 85%-90% of scrubberized ships.
Lag for clean freight increases
Because clean Medium Range tankers typically run shorter voyages and therefore work three to 10 days ahead, they have only now started to see an impact from more expensive bunker prices.
MR freight began to rise in November as owners showed more bullish offers on long-haul voyages to discharge ports in South America and Asia. Initially, this sentiment was motivated by owners’ reluctance to displace their ships from the export-driven US Gulf Coast region before cargo supply was expected to pick up in earnest in late November and December, according to market participants. Also, owners were hesitant to take cargoes with further end destinations as the end of 2019 approached, because the high/low sulfur switch needed to be completed ahead of time.
By the first week of December, most clean owners with non-scrubber fitted tankers had converted bunkering tanks to the compliant VLSFO, and thus began and are continuing to calculate their time charter equivalent rates for spot voyages, particularly the long-haul runs, on the more expensive 0.5% bunker fuel.
“If you are going somewhere like Europe, you can probably use current [3.5%S] bunkers, because afterward you can get the [compliant] bunkers needed, but if you go somewhere like Chile or Brazil, bunkers may not be available,” a shipbroker said.
Clean long-haul increases
Freight for clean long-haul voyages saw increases in early December due to the inclusion of high bunker prices, while shorter-haul voyages lagged behind. The spread between the 38,000 mt USGC-trans-Atlantic and USGC-Brazil voyages, having mostly traded at a differential of w50 higher for Brazil for most of 2019, began to widen as early as November, trading at its widest spread of w87.5 more for Brazil December 11-16.
Though freight for clean tankers in the Americas has been on a relatively steady incline since mid-November, by factoring in compliant fuel, TCEs slipped somewhat on the long-haul routes initially.
“As your cost of bunkers goes up, naturally your relative TCE goes down. However, as expected, we find ourselves in an overall constructive freight environment with realized TCEs at healthy levels irrespective of the cost of compliant fuel,” a clean shipowner said.
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Source: Platts
