Viewpoint: Asian clean freight rates under pressure
Singapore, 29 December (Argus) — Earnings for 50,000-90,000t long-range (LR) clean oil product tankers the east-of-Suez market may struggle to post growth or even decline in 2018, pressured by rising tonnage availability and uncertainty over supplies of key product naphtha.
Naphtha accounts for easily the largest volume of clean product shipments from the Mideast Gulf to Asia-Pacific. Shipments on the route received a boost in the fourth quarter of 2017, after refinery outages in northwest Europe and the impact of Hurricane Harvey in the US disrupted supplies of clean products from those regions to Asia-Pacific, and instead boosted demand for naphtha shipments on the typical Mideast Gulf to Japan route.
But LR tanker earnings still face downward pressure, as Asia-Pacific petrochemical producers look to optimise their use of naphtha against alternative feedstocks such as condensate and LPG.
Chartering rates for 55,000t LR1 and 75,000t LR2 tankers have weakened this year, while rising bunker prices have also eroded earnings for shipowners. And vessel deliveries have risen, with about 34 LR2 and 13 LR1 vessels reaching the market in January-September, compared with 32 and 16 respectively in 2016 as a whole, according to brokerage Banchero Costa. Deliveries of several newly built tankers are likely to be postponed to 2018, keeping pressure on freight rates.
Naphtha consumption in Asia is likely to continue to support demand for LRs in the east of Suez market in 2018, consultant Drewry says. But rising oil prices could lead to more substitution of LPG for naphtha as a petrochemical feedstock, reducing naphtha shipment volumes. LR freight rates have performed strongly over the past two years and the LR fleet is likely to expand by about 4.5pc in 2018, which could curb the outlook for rates, says Drewry's lead shipping analyst Rajesh Verma. And expected weakness in the crude tanker market will lead to additional tonnage inflows, as coated tankers switch back to the clean product sector.
Spot naphtha supplies are expected to be tight in the first quarter of 2018 because of refinery turnarounds in the Mideast Gulf. ExxonMobil and state-owned Saudi Aramco's Samref joint-venture 400,000 b/d Yanbu refinery, the Satorp joint venture between Total and Aramco and the Shell-Aramco Sasref joint-venture's 305,000 b/d refinery at Jubail are scheduled to have turnarounds during the first quarter.
Kuwait's spot product exports are expected to fall because of planned turnarounds at the 270,000 b/d Mina Abdullah and 466,000 b/d Mina al-Ahmadi refineries in March-April and April-May respectively. Crude distillation units at both refineries could be affected, said market participants, although the turnaround plans could not be confirmed with state-owned operator KNPC.
Kuwait is a major exporter of naphtha and has been boosting its exports to Japan. It shipped about 1.5mn t (47,000 b/d) in January-September 2017, about 45pc higher than the same period a year earlier.
One bright spot for LR tankers could be a recovery in Europe's imports of middle distillates, especially gasoil, in 2018. This could revive arbitrage-driven, long-haul shipments from east of Suez to Europe and trim tonnage availability in the Middle East, lifting freight rates from the Mideast Gulf to Japan as a result.
Recent fixtures show gasoil being shipped from Asia-Pacific to Europe, Mexico, the US Gulf coast and west Africa. But some of these bookings were done by trading firms such as China's state-controlled Unipec and Winson Oil, which charted newly built 2mn bl very large crude carriers (VLCCs) to ship gasoil cargoes from north Asia in attempt to maximise returns by using bigger vessels. Newbuilds usually command a lower freight rate for their maiden voyage.