Markets - Vessel oversupply still impacting rates in all sectors

Aug 11 2017


More VLCC activity was seen recently, but this was not enough to change the softening rate trend.

The oversupply of tonnage remains, which left competition for every firm cargo fierce among owners.

However, WAfrica/East was a slightly different story, as owners’ resistance proved stronger as few were prepared to lock into long voyages at today’s earnings, Fearnleys said in the weekly report.

Very thin activity was seen in most geographical areas during the past week. For third decade dates, West Africa has only seen a sprinkling of cargoes to whet appetites, rates softened slightly to WS65 for TD20 and TD6 maintained the WS75 level, as owners seemed reluctant to let their earnings slip any further.

Barrels moving out of the north and the Black Sea programme allowed lists to tick over but there is just too much tonnage around to be absorbed currently.

Shipowners returns are hovering around Apex and with a firming oil price, we are likely to see the cost of bunkers creeping up, which will be factored into calculations and may cause a stabilising effect on any further erosion of rates in the near term, Fearnleys said.

The outlook for the week ahead is steady, as players look to tighten their belts to ride out this challenging market.

The North Sea and Baltic markets continued at the same levels as last week even though one charterer tried to take the Baltic down by another WS2.5 points.

We are seeing a lot of ships delayed off Southwold, UK at present, which could make things a bit more interesting.

Rates are still mid to low WS80s, but unfortunately for owners, the activity has not been as good as seen in the previous week.

We have barely seen three cargoes worked in the market and fewer ships are also being fixed under the radar. It will be interesting to see how long owners can hold onto the WS80s before they will have to embrace a Worldscale number starting with a seven, Fearnleys concluded.

Meanwhile, China’s crude imports eased to a seven-month low of 8.21 mill barrels per day in July, as refiners absorbed the huge volumes imported in the first half of this year, Ocean Freight Exchange (OFE) said.

July crude imports were 4.5% lower than the 1H17 average of 8.6 mill barrels per day. According to Xinhua news agency, Chinese crude commercial stocks hit an eight-month high of 224.3 mill barrels at the end of June, which is indicative of the huge surplus, OFE said.

Heavy turnarounds and subsequently lower run rates at teapot refineries in July, also contributed to the month-on-month drop in imports. Around 1.2 mill barrels per day of Chinese refining capacity was shut for maintenance last month - up by 15.6% month-on-month, leading to an expected drop in overall crude throughput and imports.

 

However, Chinese July crude imports still saw year-on-year growth of 11.8%, albeit lower than 1H17’s average of 14.9%. This year-on-year growth has been supported by rapidly falling domestic production and robust stockpiling demand, as refiners take advantage of low crude prices.

The startup of new refining capacity - CNOOC’s expanded 200,000 barrels per day Huizhou refinery and Petrochina’s 260,000 barrels per day Yunnan refinery - is expected to support Chinese crude imports in 4Q17.

China’s total refined product exports hit a four-month high of 4.55 mill tonnes last month, up 8.3% month-on-month. This underpinned Asian MR rates in July, as average rates for the South Korea/Singapore route, basis 40,000 tonnes, was $330,000, up by 5.5% month-on-month.

Chinese product exports are also expected to rise in 4Q17, OFE concluded. 

 

Turning to the chemical and vegoil markets, vessel supply is expected to accelerate at a much faster pace than demand, weakening earning prospects, according to the latest edition of the ‘Chemical Forecaster’, published by shipping consultancy Drewry.

 

Drewry estimated that tonne/mile demand will grow at 2.9% in 2017, and the fleet trading in chemicals/vegoils will expand by 9.5% by the end of this year, the highest fleet growth observed in recent years.

The chemical shipping market is facing severe oversupply, due to new deliveries and swing tankers returning to the chemical/vegoils trade seeking employment

The orderbook still contains 9% of the existing capacity to be delivered by 2021, while the deliveries of MRs will also contribute to rapid growth. Even though the Ballast Water Convention will take effect in 2019, any expected surge in demolitions by that time will not be enough to pull the market out of its current gloomy state, Drewry said.

Combined with a bearish outlook for the CPP market, the oversupply situation is expected to continue for the next two years, which will squeeze freight rates on major routes.

Tonne/mile demand is expected to edge down from 2018. Organic tonne/mile demand growth is forecast to decline from 6% in 2016 to 3.7% in 2017, while inorganic demand is likely to follow the same trend – a fall from 7.3% in 2016 to 1.2% in 2017. As a result, long-haul routes might face challenges in the next few years.

“Although vegoil volume will support the market, weak demand for chemical products during the summer lull and the bearish CPP market continue to encourage swing players to return to the chemicals/vegoils market, reducing freight rates and pushing up lot sizes. The effect of the latter will reduce not only the number of vessels needed, but also the opportunity to find cargoes in the spot market,” said Hu Qing, Drewry’s lead analyst for chemical shipping. “This quarter freight rates on major routes are facing challenges as there are few drivers to prevent the continuing trend of declining freight rates.”

 

In a report on the demolition market, GMS said, following weeks of firming prices, cash buyer speculation (an expectedly inevitable outcome of a rising market) returned, bringing with it, a healthy collection of baffling offers that were well ahead of current market levels.

While there has been a (justifiably) sudden interest from owners – particularly in the tanker sector of late, plus other types - whose owners are keen to exploit these firming prices, a greater supply may affect demand and future pricing, leading to eventually eroding levels, as we enter the fourth quarter of the year.

Currently, some of the hotter buyers in Bangladesh have already been booked with the vast array of Aframaxes and Suezmaxes on offer. A softening of prices is therefore to be expected, as second and third tier buyers come into the mix for available tonnage.

Caution needs to be exercised, GMS said, as since the crash of 2015, the psychological barrier of $400 per ldt remains a tough incentive. Hence, expectations need to be tempered, as we approach this landmark number once again.

Overall, sentiment remained firm on the back of steadily improving steel prices, as the monsoon season and constant rains (particularly in Bangladesh) have starved steel mills of local product and currencies have also recently gained ground across the board.

Elsewhere, Brokers reported that Jinhai had agreed two VLCC newbuilding resales for $73 mill each. Although mystery surrounded the deal as ‘Tanker Operator News’ was published, the buyer was thought to be Gulf Marine Management.

Great Eastern has confirmed that it had purchased an LR2. This turned out to be the 2009-built ‘Phoenix Light’, said to have cost $23 mill.  

TORM’s recent announcement of the purchase of two new MRs was believed to have concerned Cido’s newbuildings ‘Atlantic Falcon’ and ‘Atlantic Guard’ at HMD for $32.5 mill each.

Greek interests were said to have paid about $18.5 mill for the 2009-built MR ‘Box’, while the two laid up 1999-built MRs ‘Spica’ and ‘Betelgeuse’ were thought committed to unknown interests for $5.5 mill each. Their SS are due in 4Q17.

Several MR fixtures were also reported recently, ranging from six to 12 months at rates varying between $12,000 and $13,750 per day.   



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