Freight Watch – January to February 2014
Nazir Ahmed Moulvi, Senior Analyst, Department of Research & Strategy, Multi-commodity exchange of India Ltd
Niteen M Jain, Senior Analyst, Department of Research & Strategy, Multi-commodity exchange of India Ltd

The VLCC rates over the past two months moved in both directions driven by a mixture of fundamental and seasonal factors. On one hand, an oversupplied vessels market created downward pressure on the freight rates; on the other hand, an increase in oil production in Middle East region created expectation of an increase in vessels requirement. However, concern of an oversupplied vessels market prevailed pushing the freight rates lower on route TD3 in January to February 2014.

Continuing the uptrend momentum of past two months, daily charter index for VLCCs on route TD3 (from Ras Tanura, Saudi Arabia, the world’s biggest oil-export site to Chiba, Japan), opened the month of January 2014 at 60 Worldscale (WS), up by 4.3 per cent from previous month’s close. The strong opening was on reports that 80 VLCCs were sailing towards Asian country’s ports — the most since Bloomberg started compiling weekly snapshots from IHS Maritime data in October 2011. The increased sailings to Asia was also coincided with drop in oversupply of the vessels to just 10 per cent compared with 18 per cent in the mid of December last year.

(Route TD3 is one of the world’s busiest oil route and industry benchmark. Worldscale points are a percentage of a nominal rate, or the flat rate, for more than 3,20,000 specific routes. Flat rates for every voyage, quoted in US dollars a tonne, are revised annually by the Worldscale Association in London to reflect changing fuel costs, port tariffs and exchange rates. Notably, each flat rate assessment gives owners and oil companies a starting point for negotiating hire rates.) The tide soon turned negative for freight market, as vessel owners who had purposefully idled their vessels due to low freight rates, re-entered the market to lock the higher prices. As the oversupply began to increase, the charter rates began their southwards journey. The steady decline of freight rates on route TD3 was arrested on the news that the European Union (EU) was working on suspending a ban on reinsuring tankers hauling Iranian oil. This embargo led to around 60 per cent decline in country’s exports (from 2.5 million barrels per day (bpd) to around 1 million bpd). The measure affects most of the world fleet, because 90 per cent of all merchant vessels are covered by members of the London-based International Group of P&I Clubs, according to Bloomberg. EU’s ban hindered shipments to countries including India, as the country was finding difficult to obtain reinsurance for shipments. Additionally, the uptrend in freight rates was also supported by news of increase in crude oil production in the Middle East region from Saudi Arabia to Libya, which necessarily increases the demand for transportation. Increase in production increased the ton-mile demand for vessels. As a result, the freight rates on route TD3 touched the period’s high of 70WS points on January 22, 2014.

An increase in the freight rates was greeted with increase in vessels supply, in turn pushing the freight rates lower. Further, downtrend in the VLCC shipping rates were also seen after McQuilling — a private ship broker mentioned in its report that “our quantitative analysis shows that fundamentals are unbalanced as overcapacity remains present and crude tanker demand to rise 0.8 per cent a year vs 2 per cent fleet growth in 2014-2018”. Additionally, slowing demand from China, the world’s largest importer of crude oil in view of their markets closing for a week long holiday to celebrate Lunar New Year pushed the VLCC rates to a period low of 37.5 WS points on February 3, 2014. The same day the daily earnings by the VLCCs also declined to period’s low of USD 16,171.83 per day. Once the Chinese buyers returned to the market the demand for booking cargoes resurfaced, reviving the charter market. Projections by IEA of an increase in World crude oil consumption by 1.4 per cent or by 1.3 million bpd to 92.5 million bpd also helped in improving the overall sentiment. In the backdrop of benign improvement in global economic growth prospects and an increase in oil consumption, many shipping analysts revised their expected average freight rates upwards for 2014, providing psychological support to the fragile VLCCs market.

The uptrend in the VLCC market again paused and began to falter by the end of February amidst concerns of slowing growth in China and its impact of petroleum consumption. China’s demand for diesel grew at the slowest pace in more than four years, amidst contraction in manufacturing and increasing share of services sector. “If contribution from tertiary industries to GDP rises by 1 percentage point while secondary industries drops by 1 percentage point, diesel demand will be cut by around 10 million tons a year,” according to Dai Jiaquan, a Director at China National Petroleum Corp.’s Economic and Technology Research Institute, quoted in Bloomberg, depicted the demand concerns from China.

Overall during January-February 2014, freight rates declined by 13.04 per cent to close the two-month period at 50 WS points.