Freight Watch – September to October 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

Charter rates of VLCC plying on route TD3 rose, after Saudi Arabia stepped up production to meet the production shortfall in Libya, rise in tanker demolitions, and increase in oil demand by Chinese refineries.

Daily charter index for route TD3 (from Ras Tanura in Saudi Arabia, the world’s biggest oil-export site to Chiba in Japan), one of the world’s busiest oil route and industry benchmark, opened the month of September 2013 at 32 WorldScale (WS) points, up by 6.7 per cent from previous month’s close. WS points are a percentage of a nominal rate, or the flat rate, for over 320,000 specific routes. Flat rates for every voyage, quoted in USD per 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.

Following the start of the month at 32 WS, the VLCC rates witnessed small spurt after Western countries scheduled to almost double amount of oil to be shipped to Asia. Later, however, it was reported, crude oil imports by China from West Africa was smallest in at least two years, curbing demand for VLCCs on the third-longest trade route, leading to fall in crude oil prices and impacting the charter rates. The voyage to China from West Africa takes about 34 days, compared with 20 days from the Middle East, according to ICAP Shipping. It was further reported China will buy 702,833 barrels of West African crude a day in September, compared with 973,917 a year earlier indicating a fall of 28 per cent. This was also evident from the ship-tracking data compiled by Bloomberg, which reported 65 VLCCs sailing to China in first week of September compared with 67 a week earlier. According to analysts, China was reportedly favouring Russian and Middle Eastern crude oil over West Africa oil because of lucrative prices. As a result the charter rates for route TD3 hit a month’s low of 30 WS points September 4, 2013.

Thereafter after remaining flat for some time, charter rates got boost amidst unrest in Middle East and North Africa fanning supply concerns, leading to stockpiling — boosting demand for imports and VLCCs.

Civil unrest in Libya, once Africa’s third-largest crude oil producer, forced the country to curtail the output. As a result, the production fall to post-war low of 150,000 barrels a day compared with 1.4 million barrels produced in April this year. To compensate the loss of Libyan output, Saudi Arabia chipped in to produce replacement barrels, according to the International Energy Agency. Additionally, fears that Western nations may strike at Syria in response to an alleged chemical-weapons attack increased storage demand. As a result, by second week of September the VLCCs loading rose to 143, 15 per cent more than the January to August average.

Freight rates were then also buoyed after Clarkson, the world’s largest shipbroker, raised VLCC Scrapping Forecast by 23 per cent to 3.2 million deadweight tonnes (MDWT) in 2013. Additionally, the shipbroker lowered the VLCC fleet growth forecast to 4.2 per cent to 194.7 MDWT compared with earlier estimate of 195.6 MDWT. Yet, tanker market was witnessing the biggest glut in terms of excess VLCCs (about 75) since 1985, equaling 13 per cent of the global fleet size, according to Frontline Ltd., the world’s largest VLCC fleet owner. Frontline Ltd. also urged the industry to scrap vessels aged over 15 years to reduce the supply glut. However, the fleet owners were holding on the scrapping hoping revival of freight rates in 2015. According to Carnegie SA, the VLCCs that are 15 years old or more account for about 10 percent of the global fleet, As many as 23 VLCCs were demolished by September this year, 53 per cent more than last year and the highest since 2003, according to Gibson. On the positive note, VLCC order-book is at lowest in decade (see table). This was expected to reduce the available tonnage, shrinking the supply.

By first week of October, surplus of VLCCs available to load crude oil in Persian Gulf over next 30 days contracted to 17.5 per cent, from 24 percent in the first week of September, according to Bloomberg. Higher production from Saudi Arabia increased the demand of tankers to ferry crude oil. A large chunk of increased production was bought by China. As a result the 64 VLCCs were reported to be sailing to China compared with 59 in late September. As the Chinese refineries increased processing rates, demand for oil kept pouring in, effectively reducing the supply glut to 14.5 percent, the lowest since June this year. This helped push the freight rate on Route TD3 to month’s high of 42.5 WS points on October 29, 2013. Subsequently, the freight rate closed the month at month’s high, rising by 41.7 percent in the two month period of September-October 2013.