Weight of Freight: Crouching tanker, hidden dragon

Author Sean Zhuang, Senior Reporter, Freight and Andrew Khaw, Editor, Asia Freight

Medium Range (MR) clean tanker freight rates from northeast Asia have fallen from their record highs in late September on reduced spot activity, as many participants were away for the week-long APPEC conference in Singapore during the same period. But what are the short- to medium-term expectations? Are the lower freight rates here to stay? Or could rates recover?

The calm

Chartering activity fell, with Argus recording 25 MR fixtures over the two-week 17-30 September period on the South Korea-Singapore, US west coast (USWC) and Australia routes compared with 31 over 3-16 September.

Spot trades were lower, as high freight rates caused some trading firms to adopt a wait-and-see approach and because many participants were also away at APPEC.

South Korea to Singapore and to USWC lumpsum rates & South Korea to Australia WS rates

Lump-sum freight rates for 35,000t shipments from South Korea to Singapore and to the USWC plummeted by about 23.7pc and 16.7pc to $1.45mn and $3.125mn respectively on 4 October from $1.9mn and $3.75mn on 26 September. Worldscale (WS) rates for the South Korea-Australia route fell by about 16pc to WS445 on 4 October from WS530 on 26 September.

Argus' time charter equivalent (TCE) rates from South Korea to Singapore to the USWC and to Australia fell by about 29.8pc, 22.4pc and 22pc to $58,195/d, $51,511/d and $48,995/d respectively on 4 October from $82,973/d, $66,413/d and $62,785/d on 26 September.

Several off-market deals were done directly between charterers and shipowners. But these were likely concluded at lower levels than prevailing market rates, participants added, some of which could have also combined on to larger Long Range (LR)2 vessels and/or some LR1 vessels.

Spot MR supplies over a 10 day-period increased to about 16 on 3 October compared with about 11 on 27 September and four from 21 September. Vessel supplies could continue to build as some shipowners were ballasting their vessels or possibility offering at lower levels to reposition their vessels towards Asia-Pacific. Argus TCE rates for MR vessels in the southeast Asia and northeast Asia regions were on average about $30,866.59/d higher than TCE rates on the Mideast Gulf to east Africa and east Asia routes.

Before the storm?

But MR tanker freight rates from northeast Asia had previously risen to a record high on 16 September from 26 August because of reduced vessel supplies, following delays resulting from typhoons and increased demand.

Lump-sum freight rates for 35,000t shipments from South Korea to Singapore and to the USWC rose by almost 65.2pc and 44.8pc to $1.9mn and $3.8mn respectively on 16 September from $1.15mn and $2.625mn from 26 August. WS rates for the South Korea-Australia route also rose by 44.3pc to WS537.5 from WS372.5 over the same period.

South Korea to Singapore, to USWC and to Australia TCE rates & South Korea VLSFO bunker rates

Argus' TCE rates from South Korea to Singapore/USWC/Australia increased by 102.8pc, 72.11pc and 72,2pc to $81,903/d, $66,778/d and $62,776/d respectively on 21 September from $40,386/d, $38,798/d and $36,455/d on 26 August.

TCE rates moved up by a larger margin because of lower bunker prices. The price for very-low sulphur fuel oil prices in South Korea fell to $720/t on 21 September from $783/t on 26 August.

Clean tanker freight rates in northeast Asia had been on the rise mainly because of reduced vessel availability because of biodiesel flows from China to Europe and with the impact of typhoons Hinnamnor, Muifa, and Nanmadol that formed in the region,. But supplies have now increased so should shipowners still remain hopeful?

Hidden dragon

China released a massive fifth batch of oil product export quotas on 30 September, as domestic consumption was slowing because of Covid-19 curbs and weaker economic activity. Refiners were granted 13.25mn t (107mn bl) of products, including gasoline, diesel and jet-kerosine.

Chinese state-controlled firms PetroChina, Sinopec, CNOOC, Sinochem, CNAF and Norinco received 3.35mn t, 6.5mn t, 1.17mn t, 1.14mnt, 20,000t and 100,000t export quotas respectively. Private-sector refiner Rongsheng received an export quota of 970,000t.

This brings the total volume of Chinese export quota to 52.25mn t for 2022, according to Argus records. This is already significantly higher than the 37mn t quota in 2021 but slightly less than the 59.03mn t in 2020 and 55.89mn t in 2019.

Crouching tanker

Asian refiners are also gearing up for a potential energy crisis in Europe, given soaring natural gas and power prices and a rise in heating demand in the fourth quarter.

Asian gasoil supplies are tight, with at least seven major refineries having maintenance during September-October. But output is expected to climb over November-December as winter gets under way in Europe. This could aid the flow of gasoil to this region as a substitute for Russian supplies. European gasoil demand is expected to firm as sanctions on Russian oil imports come into full force early next year and as utilities switch away from natural gas. The IEA has said it expects gas-to-oil switching to bolster demand by 400,000-500,000 b/d in Europe in the fourth quarter and the first quarter of next year.

Australian product imports have been revised higher for the 2022-23 fiscal year to 30 June because of the country's reduced refining capacity and higher than expected demand for jet fuel, gasoline and diesel. Australian product imports are forecast to average 770,000 b/d in 2022-23, up by 3.3pc from 745,000 b/d in 2021-22 and rising to 795,000 b/d in 2023-24, the Office of the Chief Economist said in its September Resource and Energy Quarterly (REQ) report. The 2022-23 projection has been revised up from the previous prediction of 761,000 b/d made in the June REQ.

Exports from northeast Asia are typically higher in the fourth quarter rather than the third quarter. The volume of clean petroleum products loaded on MRs from South Korea, Japan and China were 14.61mn t in the fourth quarter of 2021 compared with 12.5mn t in the preceding quarter. They totalled 14.79mn t in the fourth quarter of 2020 compared with 13.82mn t in the previous quarter, according to Vortexa data.

Freight rates in the northeast Asia region are poised to potentially move higher, with China’s massive product export quota, along with seasonal and geopolitical expectations.

But uncertainty about the time limit for using the Chinese export quotas could derail a quick recovery. There are expectations that some of these granted export quotas could still be valid for 2023 or at least its first quarter. Should the deadline for these exports be for 2023 instead of the end of 2022, this will reduce refiners’ need to scramble for vessels, possibly meaning freight rates might not necessarily rebound to previous record highs.

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