Viewpoint: IMO 2020 to lift European clean freight

Product tanker rates are likely to increase year on year in the first half of 2020 as the International Maritime Organisation's (IMO) 2020 sulphur cap could boost middle distillates trade movements and compatibility and fuel sourcing issues could cause logistical disruptions.

Medium Range (MR) tankers will benefit from continued gasoline demand in the US Atlantic and west Africa and from ships scheduled to retrofit scrubbers in early 2020, effectively curtailing tonnage supply. A reduction in US gasoline supply resulting from the PES refinery explosion in Philadelphia will also maintain a steady flow of around 10 extra MRs each month sailing to the US from Europe to fill the gap. And increasing refinery capacity additions in the Middle East and China will increase cargo supply in those regions.

The MR fleet is also ageing, with around 20pc of the fleet over 15 years old, brokers said. These ships tend to struggle to secure employment when the spot market is weak and generally require discounts when chartered, giving an edge to younger vessels. But gains could be offset by a flurry of MR deliveries in 2019, which were higher than in 2018. Up to 80 MRs were delivered in the first 10 months of 2019, with more scheduled in November and December, compared with just below 60 in the whole of 2018. The total fleet is over 1,600 vessels.

Handysize tankers trading both east and west of Gibraltar could benefit from increasing intra-regional distillate trade flows, but perhaps not as much as some shipowners expected. Russian refiners in particular export large amounts of distillates from Black Sea and Baltic ports. Within the European, Baltic and Mediterranean markets, Handysizes are likely to dominate the distillate trade. And in at least the first quarter of 2020, ice-class vessels will benefit as Baltic ports become less accessible.

Many shipowners expected a boost from distillate blending into the low-sulphur fuel oil (LSFO) pool. And marine gas oil (MGO), which is also a distillate product, could be a temporary alternative to LSFO for some shipowners in the first phase of the transition. But these assumptions have been put into question as LSFO demand outstripped that for MGO.

The Handysize fleet is also ageing, with over 35pc over 15 years old and few newbuilds having been added, according to shipbrokers. The fleet has grown by just 18 since 2016, according to Affinity, and numbers 500-550 vessels in total, according to shipbrokers. But Handysize rate gains could be offset by a growing MR fleet, as those vessels can trade in many of the smaller ports where Handysizes trade. And charterers have already shown appetite for MRs on Handysize routes in 2019 when MR rates provided better $/t values.

The LR2 segments will also benefit from increased refinery capacity in Asia and the Mideast Gulf, especially, as these facilities will be able to accommodate larger ships. Rates will also benefit from a significant number of LR2s that have switched to crude and dirty products as Aframax rates soared towards the end of 2019. This will curtail LR2 supply, at least in the first quarter, until the vessels clean up their tanks. This will help to partially offset the higher number of vessels delivered in 2019, compared with 2018.

In the LR1 market, freight rates should also increase as newbuild deliveries also remained subdued in 2019 with around 10 ships added to the fleet, bringing it to a total of around 390 vessels, according to shipbrokers.

But LR1 demand could be offset by increasing usage of LR2s for ports where both vessel sizes can be accommodated. In most cases, LR2s provide better $/t values and are more attractive on long-haul freight, provided that charterers have sufficient barrels to fully load LR2s.

Finally, the IMO 2020 regulation will probably cause logistical bottle-necks as the market adjusts to the new fuel specifications. Shipowners who have not secured term bunkering contracts might also face issues with using LSFO from different suppliers, as concerns remain around compatibility, depending on each ship's engine specifications, according to Argus Consulting. And these disruptions are likely to curtail effective supply and lead to temporary rate spikes.

By Nicolas Kyriakoglou