Alternative feedstocks and a spike in Russian-origin naphtha has pressured clean tanker rates in the Mideast Gulf to move down in May. Are there opportunities for recovery? Is the outlook bleak? Or are volatile rates on the Mideast Gulf to Japan route here to stay?
LR2 and LR1 freight rates for 75,000t and 55,000t shipments from the Mideast Gulf to Japan fell by 19.4pc and 12.5pc respectively to WS145 and WS175 on 5 May, from WS180 and WS200 on 4 May.
Rates were pressured to move lower as demand for naphtha has diminished, owing to alternate feedstock propane prices being at a discount to naphtha values since the end of February. The shift pushed valuable tonne-mile-demand into the gas carrier segment. Propane prices were at an average of $567/t cfr Japan last week compared with naphtha at $639/t cfr Japan. Propane-based cracker margins rose to $3/t by 15 March and remained in the positive zone until it settled at $32/t by 3 May. Most crackers in South Korea are naphtha-fed, with the flexibility to take in 10-20pc of propane as alternate feedstock. Producers such as Lotte Chemical and LG Chem since March have been on track to using propane to feed their crackers. Other northeast Asian producers such as Taiwan’s Formosa are also using 10pc of propane for its cracker feed.
Demand for naphtha from the Mideast Gulf has also been subdued, in the wake of the Russian oil product ban in Europe. Russian naphtha arrivals in Asia are on track to hit a three-year high of 347,400 b/d this month, as cargoes continue to flood Asia.
About 1.21mn t (or 347,400 b/d) of Russian-origin naphtha has arrived or is due to arrive in Asia in May — the highest in close to three years, according to Vortexa shipping data. Figures were higher than the average monthly volume of Russian naphtha that arrived in Asia over 2020 21, before the Russia-Ukraine conflict broke out in February last year. A monthly average of 241,200 b/d of Russian naphtha arrived in Asia in 2020, while 2021's average stood at around 252,000 b/d.
Storage tanks in Singapore were the top destination for Russian-origin naphtha in May, receiving 173,100 b/d, or slightly more than half of the Asia-bound flows during the month. Singapore is an especially popular destination for the product, which is typically blended with other named-origin cargoes before it is re-exported elsewhere in Asia as a cracking feedstock. Cracker operators in the Asia-Pacific — including those in South Korea, Taiwan, Malaysia and the Philippines — are increasingly receptive towards the discounted supply that emerges from these commercial tanks, propelled by weak production margins and a bleak outlook on the regional petrochemical market. Cargoes of commercial tank origins could trade up to $20-30/t lower than those of named origins for the same delivery period.
Subsequently, the spike in Russian-origin naphtha supplies to Asia has sated demand for Mideast Gulf-origin naphtha. Spot premiums for fob Mideast Gulf cargoes had climbed to a one-year high of $55/t around mid-February this year on tight supplies in Asia after the Russian oil product ban took effect in Europe. European naphtha prices soared and east-west spreads plunged into the negative territory, rendering arbitrage economics unworkable. A wrestle for scarce supplies of named origin ensued and demand for Mideast Gulf cargoes sky-rocketed, with traders paying exorbitant spot premiums in order to secure the cargoes. But the battle was short-lived, as consumers started to turn towards buying commercial tank naphtha as a more viable alternative amid weak petrochemical production margins. The injection of Russian supplies has given Asian naphtha supplies a consistent boost and buyers more options to choose from, despite arbitrage routes still being shut. What has been lost to Europe in the form of Russian cargoes has been making its way to Asia in a reshuffle of trade flows likely to persist in months to come.
The reduction in demand was clearly reflected on the spot LR market. Mideast Gulf to Japan or east Asia LR2 fixtures for early- to mid-May loading windows fell by about 54pc to about six for the 24 April-5 May recording period, compared to about 13 for the 10-21 April recording period. LR1 fixtures on the routes fell by 29pc to 5, from 7 over the same time periods.
Freight rates for naphtha shipments on the route could improve, if and when most of the crackers in South Korea emerge from the turnarounds in the third quarter of 2023. Spot naphtha buying could pick up later in May, when cracker operators buy for July delivery.
But all eyes are still on China’s downstream demand recovery. The strength seen in both ethylene and propylene prices a year ago because of high feedstock costs are no longer feasible. Downstream demand key in setting the floor for ethylene and propylene prices, which will in turn determine cracker operating rates.
Argus expects Asia’s cracker operating rates to increase gradually, moving into the second half of 2023 as China’s recovery is picking up after the lifting of strict Covid restrictions since the end of 2022. China's GDP in the first quarter increased by 4.5pc, higher than anticipated, which underlined the continued recovery of the Chinese economy. Domestic consumption is also slowly recovering but not strongly.
But the rapid expansions of petrochemical downstream capacities in China could result in more concerns over cracker operating rates. Downstream demand might get overshadowed by the increases in capacities, resulting in reduced downstream plant operating rates, hence affecting cracker run rates. The rebound in naphtha demand could be limited, with the overall outlook on the petrochemical market still weak. Cracker operators are also likely to continue turning to blended cargoes for cheaper feedstock because of margin concerns.
The influx of Russian supplies has also chewed away at the demand for Mideast Gulf-origin naphtha, with spot premiums falling to a mid-teens/t premium last week, a far cry from levels in February. Naphtha demand has also been shrunk by a heavy cracker turnaround schedule in South Korea in the second quarter, and with Japanese cracker operators reducing run rates because of weaker domestic demand for downstream petrochemical products.
LR freight rates have also been under pressure from the smaller MR tanker segment. $/t rates for LR2s, LR1s and MRs were at $49.48/t, $54.98 and $47.57/t on 4 May, which could possibly entice some charterers to split their cargo volumes, especially if the trend continues. Equivalent freight rates on MRs are likely to be seen as a positive to smaller participants as they may have smaller lines of credit, and also to bigger participants, as purchasing in smaller volumes could give more flexibility and the option to spread their risk over a period, especially since oil prices are also volatile.
Freight rates for clean tankers from the Mideast Gulf have been volatile since the start of the year.
Bunker prices have also been volatile on the back of erratic crude prices, and are subsequently likely to influence freight rates and earnings for clean tanker vessels.
Argus time charter equivalent (TCE) rates for LR2s from the Mideast Gulf to Japan rose by about 25pc from 17 April to $43,447/d on 21 April, compared to a 13pc rise on Worldscale rates, as TCE rates saw a larger jump on the back of lower bunker costs.
The price for very-low sulphur fuel oil (VLSFO) bunkers with 0.5pc sulphur content in Singapore fell by $30.85/t to $582/t over the same period, in line with lower crude prices.
But freight rates can also be negatively impacted by a continued fall in VLSFO bunker prices, as many charterers will begin to note the reduction in voyage cost. Singapore’s VLSFO bunker prices fell by $20.67/t from 27 April to $549.33/t on 4 May, hitting a six-week low.
The Atlantic basin marker North Sea Dated fell by $7.04/bl to $72.93/bl on 4 May from $79.97/bl on 27 April. US marker June WTI declined by $6.20/bl to $68.56/bl, while Mideast Gulf benchmark July Dubai dropped by $5.56/bl to $72.01/bl over the same period. Crude prices have tumbled further on demand fears following poor economic signals from China and a further US Federal Reserve interest rate rise, even as Opec+ cuts came into force.
Since the only constant is change, it is almost certain that volatility will come into play again.
Sean Zhuang, Senior Reporter, Asia Freight, Clean Tanker
Toong Shien Lee, Senior Reporter, Petrochemical, Propylene and Toluene
Vanessa Liu, Senior Reporter, Asia-Pacific Product, Naphtha
Andrew Khaw, Editor, Asia Freight