Weight of Freight: Clean Asia-Pacific MR tanker rates – Upwards and onwards?

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

Asia-Pacific Medium Range (MR) tanker rates have been trending higher since the start of the year, mainly because of strong Australian demand for clean petroleum products.

But will this be enough to sustain rates? Could China’s continued lockdown measures following their zero-Covid strategy lead to subdued rates? Or could lagging freight rates on Long Range (LR) vessels cause a downward cannibalisation into MR shipments?

Up and over demand from Down Under

Australia’s imports of clean petroleum products (CPP) have been higher year-on-year (y-o-y) by 13.79pc, according to oil analytics firm Vortexa, when Covid-19 lockdowns were in place. The country fully reopened its borders on 3 March to international tourists who are double vaccinated against Covid-19. Australian CPP imports in April are projected to rise by 8.37pc on the month to 2.85mn t and by 13.1pc on the year, based on Vortexa’s data.

S.Korea and SEA to Australia average freight rates and Australian clean petroleum imports

The country’s jet fuel consumption rose by 36pc to 79,700 b/d in February, the highest monthly level since the 114,000 b/d consumed in March 2020, when travel restrictions were first imposed on air travel to combat the spread of Covid-19, Australian Petroleum Statistics (APS) data show. The rise reflects an increase in fuel consumed for international flights departing Australia as international travel restrictions were gradually lifted.

Worldscale (WS) rates for 35,000t shipments from South Korea to Australia rose by 95.85pc to WS330 on 20 April from WS168.5 on 3 January. Rates from Singapore to Australia rose by 85.98pc to WS305 on 20 April from WS164 on 3 January 2022. Rates for both MR routes have reached new highs, rising even higher than the Russia-Ukraine conflict-jump of WS310 and WS300, for the South Korea to Australia and the Singapore to Australia routes respectively, on record-high bunker fuel costs.

Argus' time charter equivalent (TCE) rates on the route from Daesan to Port Botany rose by 220.15pc to $28,634/d on 20 April – also a record high – from $8,944/d on 3 January. And TCE rates from Singapore to Port Botany had risen by 184.09pc to $25,653/d from $9,030/d over the same period.

Daesan to Port Botany MR Tanker TCEs and S.Korea VLSFO bunker prices

This is because prices for very-low sulphur fuel oil (VLSFO) with a 0.5pc sulphur content in South Korea and in Singapore have fallen to $887.50/t and $858.05/t, respectively, on 20 April from its high of $1,015.50/t and $1,018.83/t on 9 March. But freight rates have been partially supported by high bunker rates, as VLSFO prices in South Korea and Singapore have risen by 36.12pc and 36.41pc to $887.50/t and $858.05, respectively, from $652.00 and $629.00 at the start of the year.

Zero-Covid, zero demand?

China’s economy has taken a hit and demand for CPP products, such as naphtha, have fallen as the country continues to abide by its zero-Covid-19 policy. There are fewer clean tankers heading to China from the Mideast Gulf with naphtha cargoes, a shipbroker said, which has added to supply woes in the northeast Asia region.

The Chinese polyethylene (PE) market softened with weaker fundamentals, with continued Covid-19 lockdowns in east and south China. Consumption slowed because of restrictions imposed on road transportation since late March. Producers still found it difficult to reduce stocks although operating rate cuts continued. Some downstream plastic converters were ordered to close their factories if Covid-19 cases were found. 

The demand outlook remains bearish until this outbreak eases. A zero-Covid-19 policy means the country has put in place tough healthcare measures to keep infections at bay, including mass testing, lockdowns and extensive quarantines. These strict protocols have led to a shortage in pilots and staff at ports, which has subsequently slowed down load and discharge operations and led to supply chain congestions. Port congestions stemming from these lockdown could possibly limit vessel supplies in the region.

Life of Pi

Mideast Gulf to Japan LR2 & LR1 vs MR spread

As the gap between LR and MR vessels continues to grow, so does the chance of downward cannibalism. Traders may choose to capitalise on economies of scale, as larger vessels become cheaper and more economical. And this could lead to downward pressure on MRs, as these vessels begin to compete for shipments, or as traders begin to combine cargoes.

The discount between rates for an LR2 and an LR1 to an MR vessel from the Mideast Gulf to Japan has grown by 318.92pc and 275pc, respectively, to WS77.50 and WS52.50 on 20 April, from WS18.50 and WS14.00. 

This has already begun to an extent, according to Vortexa’s data. There has been an increase in LR2 and LR1 shipments in April, at the expense of MR tankers. Clean product volumes delivered on MR tankers fell by 38.89pc to 1.1mn t from 1.8mn in March. On the other hand, volumes delivered on LR2s and LR1s rose by 7.41pc and 26.88pc, respectively, to 500,300t and 355,900t in April from 465,800t and 280,500t in March.

What’s next?

The short-term outlook is cautiously optimistic. Demand from Australia should remain firm, as the country will continue to be reliant on CPP imports. Australia currently only has two refineries after the closure of 236,000 b/d of domestic refined capacity last year, with two plants closing and converting to oil product import terminals. The two refineries produced an average of 262,000 b/d of petroleum products in January, down by 5.8pc from 279,000 b/d in December and 38pc below the 429,000 b/d produced in January 2021 when all four refineries were in operation. 

Freight rates should also remain supported, as tonnage supplies in the region remain thin. There were only about 16 vessels opening in the northeast Asian region over the next seven to 10 days, another shipbroker said. This is about half the usual quantity of 25-30 vessels when tonnage lists are healthy. High US Gulf freight rates could also continue to encourage shipowners to ballast to the US Gulf after vessels complete their trips in the US west coast.

Weak naphtha demand from China should continue to curtail LR shipments into the northeast Asia, limiting the number of LR vessels that would compete for MR shipments in the region. And a continued outbreak of Covid-19 cases in China would likely cause delays to vessels, which will add to the length of voyages and lower tonnage availability.

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