Weight of Freight: The “King’s” carriage: Can tanker owners break the cycle of low rates

Author Argus

We welcome a special guest from Teekay Tankers in this next instalment of the Weight of Freight podcast series.

The dirty tanker market has been severely depressed for over a year now. Shipowners are struggling with low earnings, uncertainty in demand and looming decarbonization goals. Can they break the status quo in the market where “cargo is king”? 

In this episode of Weight of Freight, Mikkel Seidelin, Director, Chartering & Freight Trading at Teekay Tankers joins Argus’ Head of Freight Alex Younevitch to discuss how tanker owners can make money in a weak market, the challenges of fleet supply and decarbonization and other topics.   


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Mikkel Seidel
Alex Younevitch, Global Head of Freight, Argus Media
Mikkel Seidelin
Director, Chartering & Freight Trading
Teekay Tankers
Alex Younevitch
Global Head of Freight
Argus Media


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Alex: Hello, and welcome to this special podcast episode features on both the weight of freight and the Crude Report Podcast series from Argus Media. My name is Alex Younevitch and I'm the Global Head of Freight at Argus. And, today we're taking a dive into the dirty tanker market. A lot has been said already about the recent dip in the oil prices. However, it's worth noting that despite that drop, oil prices are still miles above the levels we've seen this time last year.

It is pretty much the opposite for the dirty tanker rate, which apart from some occasional volatilities it stayed depressed for a year now, with seemingly no immediate way to climb back up. And this is quite a challenging environment for shipowners, who are faced with little earnings while also dealing with other challenges like uncertainty in demand and decarbonization goals.

So, today, we're getting a shipowner's perspective on where the tanker market actually stands, how to make money in the low freight environment, and what we might expect going forward. And for that, I'm pleased to welcome a very special guest, Mikkel Seidelin, who is the Director for Chartering and Freight Trader at Teekay Tankers. Hi, Mikkel, it's great to have you here.

Mikkel: It's great to be here, Alex. Thank you very much.

Alex: So, let's jump right in. We're recording this on May 20. So, looking at Argus data for May 19th, the race for dirty tanker routes seem to have taken quite a dip year on year. So, for example, the Suezmax rate for West Africa to Europe is around 47% lower than it was on May 19th, 2020. It's even worse 52% for the VLCCs from Middle East to the Far East. And many people talk about negative earnings for ship owners. So, my natural first question to you, Mikkel, is what's your view on the current state of the market? Is it really as bad as it seems, and as some people tend to say?

Mikkel: We still haven't seen all the demand returning to the market yet for the crude tankers. And that's where we are in these dire straits that we are right now. Comparing May freight levels of '21 with May freight levels of 2020, that's, obviously, a massive difference in it. And also the world is a very different place now than what it was 12 months ago. But looking at just yesterday to the way the market has developed or hasn't developed each day at the floor and very low earnings. It's a tough environment for sure.

Alex: But actually, is it negative earnings because, again, I think there was a lot of misunderstanding generally when people quote, let's say this is a negative TCEs for shipowners. Is it actually negative where a shipowner can't cover their operating costs, or is it not that bad?

Mikkel: It definitely is bad. But we just had earnings season for a list of tanker entities last week. And as I'm sure a lot of listeners will have noticed is that even though we've seen benchmarks drop into the negative TCEs, every entity delivered positive TCEs somewhere around for an Aframaximum of around $10,000.

And even if the benchmarks average for say, Q1, would not be negative, it would be maybe $2,000 or $3,000 a day you would, you still see a significant increase on what the actual earnings reported is. And the reason for that is, benchmarks are just that, they are benchmarks, and very few if any owners are trading only on the benchmarks or is only experiencing a fuel cost on the benchmarks as well.

So, the input is different. And the trade patterns and the triangulation will prop up your earnings to some extent. Plus, you still have 20%, 25% of ships on ship days are still sitting on demurrage or close to maybe a little bit less now but maybe close to 20% of the ship days are sitting demurrage. and demurrage rates are still hovering in the 20s depending on the segment. And that, of course, will prop up the overall average.

Alex: So, that's interesting because you mentioned a few things, I guess, which relate to how to maximize earnings, as a shipowner. It's not as simple I guess as A to B as we both know. So, in the world freight rate environment like this, as a...when you do freight trading, when you do charter the ships, what are the tools you have at your disposal to maximize earnings when the rates are low? You mentioned triangulation. So, how does that work? Any other tools that you might use?

Mikkel: How to make the ideal triangulation for any given tram trading segment that is...that question is as long as shipping itself, I'm sure. But at its very core of it you're trying to limit your ballast and you're trying to increase your laden with the view that when a ship is laden, you get paid for it. That's really where it's at and that will increase your earnings. But the benchmarks or the overall market condition now, of course, even though if you were slightly better off, the levels are still not sustainable, even at the earnings that was reported last week.

And we are down to a level sometimes where you have to pass on cargoes being done certain levels because you simply, you are only facing negative TCEs and in which case it is better to sit and do nothing than to commit the vessel for a voyage which has negative TCEs. And we have seen over this year so far alone when the market dipped into negative TCEs in early January when we came back from the New Years' we did see a week or two of negative benchmarks, but it did correct itself. It didn't firm up but it was a realization amongst the owners and I think charters as well, that this was not sustainable. And, the market did correct itself up to a level where at least owners would not spend money just to move the cargo.

Alex: And that's an interesting topic in itself, in terms of spending money to move the cargo because it might depend on what type of let's say, shipowner, ship operator it is. Whether you have your vessels on-time charter, and maybe you need a cash flow to just move the ships no matter what the rates are, as some say or whether you directly own the asset and you do the chartering for it, is there really much of a difference in terms of how shipowners might approach the low freight environment depending on how their commercial model is?

Mikkel: That's a very good point, Alex. We see on the large tankers how each commercial operator approaches the market and how decisions are being made it very much depends on the background. If you are an oil company, a trading company and you have your own time charters in-house, you probably are still net long freight. And as such a low-market and having freight as a cost, what is your incentive to prop-up the freight levels into a level where it...because you're still...you're offsetting that against your freight costs in the company.

Then, of course, then you still have the owners and commercial operators where the pure ship owners who actually owns this deal, manning the vessel, paying for these things, they are the ones who need the TCE to be positive, to have positive earnings. But as we know we do have commercial operators in a lot of these segments which their main source of income or fees and commissions off the gross revenue, so not net of fuel and so on.

And sometimes for them, it makes sense for their bottom line to... It's more important to keep the vessel running to keep the fees and the commissions flowing in for their revenue than to make sure that the vessels are being fixed at a positive TCE. And that creates some surprising deals from time to time. And, I can only say to that is, that it's important when you as a shipowner or a tanker owner, when you seek commercial control of your assets, having full alignment with your interest with your commercial manager's interest, is absolutely key.

Make sure that when you make money, they make money and vice versa, and their incentives 100% align with yours. I think that's the key thing to keep the market healthy. Now, fundamentals overall, of course, are weak so I will not...it will prevent maybe some of these dips into negative territory but obviously it will not solve the overall market and I can, unfortunately. If we had more focus on actual net revenue than just moving the vessels and keeping them, keeping the gross revenue flowing through companies.

Alex: Makes sense. And, also, since you mentioned let's say charters so, let's say oil majors, for example, be traders who might have the vessels which they have on time charter, which are referred to as relets in the market, do you find in these low market environment as well, that those relets, for example, still might get, let's say preferential treatment? Either would we by the broke end get and fix at a lower rate just to, you know, get them moving when they're available.

Mikkel: Yeah, I think our customers, the oil companies and trading houses, they have done a good job leveraging their position and their relevance to market players to make sure that they have a good visibility, good access to other [inaudible 00:11:06.423] utilization of the relets high. That makes perfect sense for them. And, especially in a weak market, that has value, that they can keep their ships moving compared to... But also, I mean, and that is the top priority even if there are no TCEs out there that are in these market conditions, there are a few at least that are making money and a fixed rate TCE and so it's all a case of mitigating. And we also see it as well, when the volume is already low and the supply of ships already are the same we do see, of course, a lot of oil companies, they have less cargoes in the market, and they're using their own relets first as you would expect as is their priority, it has to be that way. But there are some customers who are leaning more towards rather have a sort of a, instead of the partnership approach, they would like to have a pure owner running ships to manage their freight solutions.

And, from the broker's point of view, you know, if... And whether we agree with it or not, cargo is king in this market. The brokers that managed to source cargoes and have access to cargoes are the ones that owners wanna talk to because they need to fix the cargoes. So, to keep the charterers happy, make sense for a broker. So we can [inaudible 00:12:40.200] how the balance should be. But that's the structure of the market at the moment. And, I don't see it changing anytime soon. But if they will change it's up to the owners to step up with another solution to it.

Alex: Makes sense. So, in other words, just to confirm, so if we're talking from a broker's perspective, most of the time, and especially in a market like this, if you want to make sure that, let's say a charterer for who has relets, gives you more cargoes in the future, you are more incentivized to fix their relets rather than some other owner because that might give them more into their good graces and give you more cargoes later?

Mikkel: Potentially. It'll be down to [inaudible 00:13:30.661] charter, or what their setup will be. But that's the market. Everyone is using the leverage they have available to their benefit.

Alex: Makes sense.

Mikkel: And, it does make it, it does make it an uphill battle if I wanna say, at times, but then it's up to the owners to balance the status quo and come up with something...a better offering. The market doesn't wait for anyone.

Alex: So, what would be the better offering? So, if we're talking this is the situation we're in, yeah. I'd say it might be a bit quite flawed in many ways. If you see... Standing in the shipowners' shoes, and you're talking about better solutions so how to, let's say, break this status quo, this cycle where the rates are low, what are the tools, what are the ways to do it?

Mikkel: It's a good question, and I don't have the straight-up answer. If you look at other industries, especially in recent years, a lot of industries have been...the relationship between whether it's B2B or B2C, the relationship between customer and vendor or service provider has changed a fair bit with the implementation of technology. And most of the time it has created a more direct dynamics and much more visibility and much more transparency of what's going on in the market.

I think it so much was that direction we are heading as well in tank of freight and AIS, for example, is a good first step that's become second nature to everyone out there now. And that's a good first step. But in terms of actually getting the deals done, maybe something more is to be had. But, in terms of technology and making the relationships more mutual beneficial over the long term, I think that's vague enough.

Alex: How will this direct relationship or more direct relationship actually look like when say, you mean, between the shipowner and the chatter, for example?

Mikkel: Well, there's still always room for brokers. I think there's a lot of strong brokers in this market and they'd add a lot of value for the principles out there. There's no question about that. And so, there's plenty of room for everyone. But I think when we're going into... I think when cargo finds ship, the criteria that needs to be used going forward to now with the technology that we have available and the transparency in terms of, you know, AIS and other technologies, I think there's things that could be optimized. Utilization could go up, if we just...if that's what we're prioritizing compared to other criteria. If utilization goes up, it also means we can use less resources on solving the same freight solution. And that goes into maybe, you know, we can lower emissions to transport the same amount of cargo and, you know, this is where maybe the likes of SCC are coming into it. But, you know, to really solve these problems, you need to have all the stakeholders aligning more frequently and putting their heads together and going well, how do we...not just how do I save half a point of this fixture?

More in terms of like, well, how do we, for the long-term, come up with solutions that are more sustainable? And I think the current model, at times, I wouldn't say all the time, there's, definitely good work being done. But at times, it's not really constructed that way towards that end, I would say.

Alex: So you're thinking about more of the big picture way of looking at things, right? So, we're talking about how shipowners, and charters, and brokers when they're involved can look at what's a commodity flows or arbitrages and connecting with the freight utilization and see where the opportunities are for basically either moving the tonnage or which ratios are fixed, things like that?

Mikkel: Yeah, I think it's already happening with as being, again, I said in a second nature to most companies out there now that, for sure. And more joint planning, I think to optimize these things, I think could be beneficial for all parties, if done correctly. But a specific shelter training freight online or something like that which has been tried many times in the past is very difficult to do. And we're not dealing with a massive amount of deal flow here either in these segments. So, I question whether that is the right solution. But, there's so many other smaller initiatives that can be done like just sitting down and planning and scheduling and planning your, you know, matching supply and demand a little bit further out than just fixture by fixture by fixture because, as you said, you're missing the bigger picture sometimes in terms of what are we really trying to solve for. And what we're trying to solve for, I think has changed over the last couple of years here with the focus on emissions.

Alex: Of course, and that is another good topic, emissions, obviously. The shipping market is facing quite a, let's say ambitious goals in terms of decarbonization. And that already places quite a few tough decisions in front of shipowners, in terms of what kind of solutions they wanna bet on in order to meet those emission goals. And most of the time when people talk about it, there is a very high pitch of uncertainty there in terms of what solution we're gonna go for right now if we were to put money for something at this very moment. Where do you see this going? Are we gonna see... First of all, is the solution there, for example, for 2030 to 2050 goals yet? Is the future let's say in an investment into a niche, which can switch between different bunkers, that's where it should go to, or maybe it's just all gonna go ammonia, or hydrogen, or anything else? Where do you think we're all going in this?

Mikkel: Yes. Now, Alex, that's the... It would not even a billion-dollar question. It's probably a trillion-dollar question. It's extremely difficult to landscape because just when... Well, one example, for example, just to give an idea of how difficult it is to navigate the scene right now. I think personally, six months ago, I was relatively convinced this is all gonna go LNG. And it could still all go LNG. They're the dominant fuel for the marine industry. But I'm a little bit less sure now. That's my personal opinion. No, just because you're seeing other technologies might be moving a little bit faster than what I expected initially. So, the breaching fuel might not be needed to the same extent. But I wouldn't rule LNG out still. Because there's still no other... That's the only real viable solution there is to lower it, but not to solve for it for the goals that has been set.

And so, from a decision-making point of view, it's a tough one as well, because you can sit at some point, as a player in this market, or in this industry, you have to make, you have to place your chips. And if you wait too late, there might be some first-move advantages gone. But if you go too early, it will...being the first move was going to be too pricey. And I think...

Alex: Or you might bet on the wrong first move, right?

Mikkel: Correct. And or you go too early. I think, somewhere out there, there's a really compelling business case, I think on containers that the company, if I remember correctly, the company who invented the container concept, went too early, and they ran out of cash and went out of business before it was fully implemented. It doesn't mean the idea was bad. It just meant that they were...the infrastructure was not there to...and the ecosystem was not ready to fully utilize the ideas.

So, there's a lot of variables that needs to be factored in, not just what you're going with but also when do you go with it. If you could build an ammonia and a tanker running on merchant vessels running on ammonia tomorrow would you build it or would you wait until some infrastructure has been constructed? I have to, we have to give props to the charters and owners who went early with LNG and gave it a go, and gave it a chance. Is it gonna pay off? I would say it's too soon to say. But we have to admire them for showing the initiative.

Alex: Proven, in this case, if we're talking, you know, tonnage, again, and where you're gonna go with it, it seems like there was like more secondhand S&P, for instance. And all the time people allocate that to the fact that no one knows or like, no one's sure what bets to make, again, on which fuel. Do you think that's gonna continue for like, let's say, a year or two, or we're gonna see like another wave of new buildings of people going for dual fuels or like starting to make investments more in LNG or any others? I mean, is there...does it feel like there is some kind of critical mass assembling for one solution or any other, for example, which might break the cycle?

Mikkel: Yeah, I think critical mass is a good word of tipping point to use another, again, one of the bus terms. There needs to be enough vessels, the merchant vessels built. It doesn't just have to be tankers, but merchant vessels built that will run the LNG so for the infrastructure to be build up. And, it doesn't necessarily have to be on tankers. I would imagine, and I think we're seeing it already. It'll probably be containers or other line of trade, that will know where the next fuel stem is gonna come from every time.

And, once we see them reaching a certain critical mass then the risk of, and also solving out any optimizing the solution as well make sure that it's the right engines and it's as efficient as can be. The LNG industry has had a rapid development over the last 10 years in terms of how their engines run. So, again, if the containers are sort of...the first segments creating the demand for LNG bunkering, then I think the trench rates will probably follow in their wake.

But that's probably the ones to watch. And I think that's been, it's been a lot of cases, a lot of sort of presentations that I've seen that's made that case to wait for the containers to sort of get the momentum going. Whether then there will be another technology in a couple of years that all of a sudden becomes feasible, it's extremely difficult to say.

Alex: And rolling back to bunkers, by the way, because we...it's one of those things because you also mentioned when you talked about the earnings and, obviously, the bunker prices have a massive impact on what the earnings for the voyage actually are. And just looking now [inaudible 00:25:43.830] data, I'm seeing that still, let's say the spread between 0.5% and 3.5% fuels is around $100 and has been around there for a while now.

Does the scrubber game still work? Yeah. Is it still worth it considering the new decarbonization goals, considering where, like, a new solution like... Either the difference in earnings between the scrubber ship and non-scrubber ship good enough to make it work?

Mikkel: I mean, for sure, right now, the ships that can still make sense, it's not time to sailing, you know, if you take $100 off your off fuel cost, you know, your TCE will go into the positive when normally would be negative. So, it allows you to trade but at the same time, you also have the investment that you need to pay off. And it's not, it's still not a business that's $2,000 or $3,000 a day versus minus one. Looking forward on the scrubbers, it's a good question.

My personal view, I wanna make that clear, has always been that it's a shame that the industry is focusing on a short-term patchwork solution, such as scrubbers, instead of investing more heavily into resolving the real problem, which is, greenhouse gases. Because this doesn't do anything in this regard. And so, therefore, from an overall point of view, I always felt that that's a bit of a shame that we putting resources and energy into this patchwork, which, I'm not sure if it's really solved any environmental issues really given that the waste just goes into the oceans instead.

So, going forward, I mean, we didn't... Teekay, we didn't do any scrubbers. And, unlikely we won't do any going forward. I still see new bills being delivered with scrubbers on board and we're also seeing new bills being ordered with scrubber options and then, we'll see how it goes from then. I think at $100, I think the pay getting back to breakeven, I think is, like, something like two and a half years which, you know, that's not too unreasonable from a financial point of view.

But the risk, again, is restrictions around when and where you can use the scrubbers, especially open loop, of course, are probably only gonna intensify. And as LNG becomes more prevalent, and you have more LNG carriers on there, and then the need for scrubbers is diminishing. But right now and in today's environment, sure the TCE is higher but of course there's also an initial CAPEX that needs to be justified. So, it has to be higher, of course.

The thing that always has value is of course the equity science, which is must have been a good investment, especially in this market like now. Available high fuel prices, that's definitely been worthwhile. And that has had real tangible value on all fronts, financial and environmental.

Alex: Make sense. Okay, so to round off then, all considered we're talking about currently freight rates, uncertainty still about fuel, and obviously, it's hard to make investment decisions both when you are not making that much money as you would like, and you're faced with big investment decisions. What needs to change, let's say, for this market to actually swing back in terms of freight rates coming up, for instance, and in terms of earnings coming up for the shipowners? Is there any particular things that need to happen? We're talking about obviously not geopolitical things or Russia's like you might have from like something's happening again on the pandemic side or things like the colonial pipeline going offline, but something sustainable. What is there that could help to turn things around for the dirty tanker market?

Mikkel: I like the way you phrased the question, Alex, with something sustainable because the last two significant spikes in the tanker market has been caused by geopolitical events. So, to answer your question, the OPEC plus cut needs to be rolled back. And that's something where we can see the milestones sort of coming up month-on-month, rolling up on up until July. Obviously, May hasn't made any impact so, fingers crossed for the next two months, when we see more crude having to go on tankers, maybe that will... At least give us a sense of how far away from equilibrium are we. I also think we need to see some Chinese leaving the fleet for scrap. And, because it is always applied and I... So, we need to see improvement. And I mean, on both sides of the board, both demand has to increase and with the immediate view on your OPEC plus cuts rolled back.

And then we need to see some of the older tonnage go to recycling so that it will tighten up a little bit on the other side. Other than that, looking further ahead, there are positive signs as a lot of research brokers will tell you, or analysts will tell you and I'm sure you've seen it as well that we are in for potentially more time mile environment where we see the production go up and where we see the demand go up. It should require overall the global oil demand aside, the demand for freight should go up in the medium term and, that's something to look forward to. And the overall supply of new ships as in the large tanker space is also fairly limited. It's not quite as heavy as it has been in previous years. So, there are definitely positives. But we need these recycling numbers to increase and we need to have OPEC plus production to come back and at least see what that does and get a sense of how far away from equilibrium are we. So maybe we should do this again in August and then we'll see where we are at that point.

Alex: Sounds like a good idea to me. All right, lovely. I think we can finish off here. Thanks for being here today, Mikkel, and sharing your perspective on the market. It was very insightful. And, thanks to everyone who listened. If you would like to get more insight into shipping markets, do check out the Argus Freight Service which includes prices, news analysis, and a bunch of special bonus content. Also, for more free content like this, visit the Weight of Freight page on the argusmedia.com, where we publish regular podcasts, blogs, and webinars. Till next time, and keep safe, everyone.

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