Higher Chinese refinery runs will support product tanker market

Nov 24 2017

Product tankers trading in the Far East are enjoyed a better second half of 2017, relative to the first six months of this year.

On average, they have outperformed the Atlantic markets, Gibson Shipbrokers said in a report. 


Whilst earnings in the West have generally had a difficult second half (despite some firming last week), the Far East market has been the consistent performer, gradually firming into 3Q17 and only easing marginally into the first half of 4Q17.


Part of the strength has followed seasonal trends. However, this year the market received an extra boost from the aftermath of hurricane ‘Harvey’, with demand emerging late summer/early autumn to fill shorts on the West Coast of North and South America.


Whilst this demand has faded, the product markets may still be feeling a longer lasting impact in terms of thinner tonnage lists from displaced vessels, stronger refining margins and higher trading demand, particularly from North Asia.


Increased activity from China was a key support factor in recent weeks and looks set to continue to underpin the markets for the balance of 2017, Gibson said.


Earlier this month, the Chinese Government issued an additional 5 mill tonnes of product export quota to the state-owned refiners to use up by the end of the year.


This, coupled with good margins, has encouraged refineries across China to boost the export market. Whilst independent refiners have not been granted the same export rights, they have positioned themselves to fill the gap left behind by the state-owned refiners who have less restrictive access to the external markets.


This points to higher export demand emanating from North Asia for the balance of the year. The country’s ban of >10 ppm diesel in ships and tractors has also forced some players to clear storage and boost exports of the higher sulfur grade.


Elsewhere in the region, strong demand for naphtha from the petrochemical sector is driving trading of the light distillate across the region. Tighter supplies and firmer LPG prices are making naphtha more appealing to petrochemical producers. Cracking margins have also been firm of late, even with some recent softening.


Whilst this is supporting flows from the Middle East and Europe, further trading opportunities have been created within the region.


Moving into 2018, Chinese product export quotas may need to be raised further. The Chinese government has raised crude import quotas for independent refiners by 55% to 2.85 mill barrels per day. Whilst undoubtedly part of this increase in import quota will supply domestic markets, there is scope for further increases in refined product exports.


New refineries coming online will also boost Chinese refining capacity. PetroChina’s Anning refinery (260,000 barrels per day) in Yunnan is now supplying regional demand, whilst CNOOC’s 200,000 barrels per day Huizhou Phase 2 plant is in start-up mode.


Aside from these plants, limited regional expansion is scheduled for 2018. However, higher regional refinery runs from recently commissioned and existing plants will continue to support products trade across the region, even if the growth is slower than in recent years, Gibson concluded.


The Asian MR segment is holding firm in all three key regions - AG/WCI, Singapore and North Asia.


Rates in all regions have crept up steadily since the start of November, as cargo demand outpaced vessel supply, tightening position lists in the region, Ocean Freight Exchange (OFE) reported.


In the AG/WCI market, robust demand to move naphtha cargoes East, as well as CPP cargoes to East Africa, pushed rates for the key AG/Japan route to their highest levels this year at WS180.


Sustained demand for naphtha in Asia led to naphtha cracks hitting a near two-year high last Monday on the back of unattractive LPG prices. In addition, steam crackers were running at maximum utilisation rates.


Tender data indicated that Tanzania and Kenya are importing around 917,000 tonnes of diesel, jet/kero and gasoline this month, up by 8.3% month-on-month.


The unusual strength in MR rates is likely to prompt a switchover to their larger counterparts. For example, LR2 and LR1 rates for an AG/Japan trip are currently lower by $8.58 and $7.56 per tonne, respectively, OFE said.


Higher gasoline imports into Indonesia, as well as mixed aromatics cargoes into China, have tightened the position list in Singapore, leaving less tonnage available for ballasting over to the AG/WCI region.


Rates for a Singapore/Australia trip basis 30,000 tonnes and Singapore/Japan voyage on the same basis, surged by WS37.5 points and WS20 points, respectively, since the start of the month.


Pertamina recently turned to the spot market to fill a supply gap, due to planned maintenance at its TPPI splitter in November.


Firm demand for long-haul shipments, such as North Asia/Australia and North Asia/US-Mexico, has boosted the MR segment in the North. Around 660,000 tonnes of CPP from North Asia has been booked thus far to move to the US and Latin America for November loading, up from 435,000 tonnes reported in October. Mexico has been importing increased volumes of diesel ahead of market liberalisation reforms next year.


MR rates in North Asia have firmed with rates for a South Korea/USWC voyage basis 40,000 tonnes up by $250,000 to $1.25 mill since the start of the month. Rates for a South Korea/Singapore run on the same basis grew by $70,000 over the same period to $470,000.


The recent release of a new batch of Chinese export quotas of 5 mill tonnes is expected to keep cargo flows steady, lending support to MR rates for the rest of 4Q17, OFE concluded.   

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