Viewpoint: Tough 2019 for Asia long-range tanker market

The east of Suez long-range (LR) tanker market faces a challenging 2019, as the US-China trade war and the pending International Maritime Organisation (IMO) regulations on marine fuel sulphur content disrupt trade flows and add to costs.

The IMO legislation, which will cut sulphur content in marine fuels to 0.5pc by 2020 from current levels of 3.5pc, could add to costs at shipping companies as they prepare for the change. And a separate IMO regulation requires all vessels to install ballast water treatment systems (BWTS) in their next visit to the dry dock after September 2018, ahead of the implementation of the rules 12 months later.

Cleaning bunker tanks in preparation for IMO 2020 compliance is likely to take 3-7 days per vessel, which may result in more downtime across the entire fleet than the time required to fit scrubbers or BWTS, says Anoop Singh, regional head of tanker research at broker Braemar ACM. And dry dock visits are likely to last anything from 10-30 days longer in 2019 as many vessels install scrubbers, he adds.

Product demand wanes The strength of oil product demand in 2019 is also a source of uncertainty for the LR market. Global economic growth appears to be weakening, according to forecasts by the Group of 20 major economies, while abundant supplies are weighing on refinery margins of petrochemical and gasoline products.

This may limit arbitrage opportunities and curb demand demand for oil product tankers, says Peter Sand, chief shipping analyst at shipping industry association Bimco. The outlook for gasoline in Asia-Pacific has turned increasingly bearish amid rising competition from ethanol-based and other alternative fuels. Unattractive margins have dampened demand for naphtha as a feedstock and hit east of Suez LR shipping volumes.

But there are some bright spots for the market, with the fallout from the IMO changes creating opportunities for those prepared to take them. Market disruption could intensify from the second half of 2019 as shipowners rush to prepare their vessels to meet the IMO 2020 deadline, which could add to spot trading of LR tankers.

There may also be an increase in distillate trade, including of bunker fuel blends, in preparation for IMO 2020, Singapore-based Vantage Shipbrokers says. Arbitrage flows of middle distillates from the Mideast Gulf and India to the UK and Mediterranean already picked up in the fourth quarter of 2018. This bolstered the time charter equivalent (TCE) earnings of LR tankers, as more vessels were taken for westbound distillate voyages. The tight supply of tonnage lifted TCE levels for 75,000t LR2 tankers to $30,643/d on 4 December, the highest since 15 January 2016. TCE rates for 55,000t LR1 tankers were at $21,731/d on 18 December, the highest since 15 January 2016. The LR2 TCE levels were higher than Aframax TCE earnings of around $20,000-$22,000/d.

LR supply to rise Braemar lists 25 new LR2 tankers and 14 LR1 vessels that are scheduled to be delivered in 2019, up from 18 and 13 respectively in 2018. This represents net fleet growth of around 2-5pc for both classes of vessels.

But almost 100 medium-range (MR) tankers are due to be delivered next year, which could stifle any potential upside in east of Suez LR chartering rates. The LR2 fleet is more versatile than its LR1 equivalent, as they can easily switch to carrying crude or dirty products without the need for cleaning, ship broker Charles R Weber says.

The import tariffs imposed by the US and China as part of their continuing trade war are unlikely to lead to a drastic change in volumes of clean petroleum cargoes. But there is likely to be more volatility in the LR freight market in 2019, because of a potential mismatch in spot cargo volumes and availability of tonnage in the Mideast Gulf. Spot shipments from the Mideast Gulf to north Asia are mostly naphtha. But many Mideast Gulf producers have locked in long-term contracts with these buyers, which could lead to more contract of affreightment (COA) agreements being signed with shipowners as buyers seek to hedge against any volatility in freight rates ahead of IMO 2020. And spot tonnage availability could be affected by the longer waiting time in dry dock visits, especially as vessels scramble to comply with the IMO regulations as the 1 January 2020 implementation date nears.

Related News