Freight Watch – November to December 2013
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 spike in VLCC rates over the past two months is driven by a mixture of fundamental and seasonal factors. Growth in manufacturing in US and China — world’s two largest economies have increased the expectation of higher energy demand. Additionally, winter season have traditionally seen high demand for energy and hence for VLCCs as well to carry the oil.

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 November 2013 at 50 Worldscale (WS), up by 17.6 per cent from previous month’s close. With charter rates surging further through the end of 2013, the opening day’s rate eventually emerged as the lowest rate for the months of November and December.

Route TD3 is one of the world’s busiest oil route and industry benchmark. The freight rate on the benchmark route rose sharply as the excess capacity in VLCC market fell to the lowest in last six months. 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 without having to calculate the value of each deal from scratch.

Acceleration in VLCC bookings by Chinese freight traders to load Middle East crude helped sapping fleet surplus that depressed the rates for most of the year. The sentiments in the VLCC market were positively triggered after it was reported that China paid about 13 per cent premium over spot rate to hire a VLCC. At the same time West African demand was also reported to be robust, indicating a part of vessel surplus was also absorbed by this region.

In a marked shift from the past, traders were eagerly booking the VLCC for December cargo in the first week of November. Traditionally, the forward month booking begins only in the second half of the preceding month. This shift in strategy also hinted the desperation of the traders to secure the vessel for charter, thereby pushing the freight rates higher.

The news that 16 VLCCs were demolished in 2013 totalling capacity of 4.7 million deadweight (mdwt) tonnes also buoyed the mood of the market, indicating the market may revive soon. The demolitions left only 87 VLCCs, making up 25.9 mdwt, equivalent to 13.7 per cent of global fleet capacity, which are built before 2000, thus creating a decent potential for rebalancing the crude tanker market going forward. Additionally, it was reported many of these vessels were due for special survey, which may encourage owners to scrap to save on cost.

The news that Chinese will increase crude oil processing by 6.3 per cent to 10.1 million barrels a day in the current quarter pushed the VLCC charter rates to the period high of 62.5 WS points on November 18, 2013. Strong demand helped charter rates to stay at higher levels for extended period of time. The onset of winter also increased the seasonal demand for crude oil, which in turn increased the VLCCs ferrying the cargoes. Apart from increase in seasonal demand, the increased flow of crude from West Africa to China also helped the rise in charter rates. On fundamental note, China’s overall imports of crude oil in November edged up 0.8 percent from a year earlier to 5.76 million barrels per day, according to data released by Chinese Customs Department.

Moving forward the momentum was largely sustained, though the freight rates receded to some extent. Report by Clarkson Plc, the world’s largest shipbroker, stated it expects VLCC fleet’s carrying capacity will increase by 0.9 per cent compared with an increase of 2.9 per cent in its demand, - adding to positive sentiments, and hence helping in sustaining the momentum in the freight rates.

As the year-end approached, the hiring spree slowed, and subsequently the freight rates also receded. Overall during November-December 2013, freight rates increased by 35.3 per cent to close the year at 57.5 WS points. On an annual basis the freight rates increased by 21 per cent in 2013.