Cement makers should lock in fixed price freight contracts for at least some of their kiln fuel needs ahead of new regulations on bunker fuel, HC Trading's deputy general director of shipping said.
While weaker global trade fundamentals could weigh on time charter rates, the increase in bunker costs because of new International Maritime Organization (IMO) sulphur content limits will raise total freight rates for shippers, Mert Eyigün said at the Argus Mediterranean Solid Fuels conference in Istanbul.
Eyigün said shippers should use fixed price contracts of affreightment (COA) for some of their 2020 freight needs.
It is crucial that this contract not include a bunker fuel adjustment clause, which many shipowners are looking to insert in contracts because of the uncertainties surrounding fuel supply and costs. This bunker fuel uncertainty is the main reason to lock in a freight contract, as time charter rates are more or less stable, or possibly even falling.
"If you agree on bunker adjustment factor, it is not going to make any sense to have a COA. If you want to have a COA — to take a position, safe position, known position — you have to have a fixed price COA. So this is what we can suggest," Eyigün said.
Eyigün expects that freight rates for petroleum coke voyages will start to increase in November of this year as ships begin switching to low-sulphur marine gas oil (LSMGO) or low-sulphur fuel oil, ahead of the rule's implementation on 1 January 2020.
Based on his calculations of the higher costs of burning LSMGO compared with high-sulphur fuel oil, the freight rate for a 50,000t vessel from Houston, Texas, to Iskenderun, Turkey, would increase by $2.80/t in November 2019. The rate for a similar size ship from Davant, Louisiana, to Krishnapatnam, India, would increase by $5.30/t, while the Davant to Fangcheng, China, route would increase by $6/t.
Because of these expected fuel-related freight increases, Eyigün urges cement makers to build up coke stocks prior to October 2019 to avoid having to make a large number of shipments at the end of the year.
The trend in forward freight agreements on the Baltic Exchange suggests that shipowners and investors believe that the majority of the disruption from the IMO regulations will occur in the fourth quarter of this year. By the first quarter of next year, investors expect ships to come back into the market after installing scrubbers and to have largely sorted out their fuel needs.
Because of this view, the time charter portion of the freight rate is in backwardation on the forward curve for the first quarter of next year. But the other factors of the freight rate equation are likely to have a major impact on rates.
"We think the shipping and freight markets will be highly volatile, same as the commodity markets," Eyigün said.
The supply side of the freight market is very difficult to predict as it is hard to know for certain how many ships will enter and leave the fleet and how fast each ship will move, with slow steaming suggested as a cost-saving strategy by many shipowners.
Political disruptions, particular the US-China trade war, are also likely to have a major impact. Trade war impacts could reduce global trading by 3pc, according to HC Trading's view.
Locking in at least some portion of a cement maker's freight needs now is advisable to take advantage of the backwardation in forward freight markets at the moment, since when the IMO disruption comes, markets are likely to move rapidly, Eyigün said.
