Asian Long Range I tanker freight rates have fallen sharply in the last 10 trading days as tonnage piled up in the Persian Gulf and charterers were slow to hire vessels to move naphtha and middle distillate cargoes.
The benchmark PG-Japan 55,000 mt route has fallen by 17 worldscale points since March 23, Platts data showed.
The relatively quick turnaround of vessels due to shorthaul voyages between the Red Sea and Persian Gulf, a fall in naphtha imports to Japan and the cheaper availability of LR2s have dragged down demand for LR1s.
Industry estimates project Japan’s naphtha imports to slow by 20,000 b/d to 470,000 b/d this year.
In their quest to get a cargo on a longer voyage or to avoid being anchored idle for several days, some owners are prepared to fix their ships below last done rates.
“We have been doing shorthaul voyages for quite some time now and when an opportunity for a PG-Japan voyage came, we decided to give a discount because the early April position list was long,” said a source with a clean tanker owner.
The choice for LR1 owners is to idle their vessels for a few days or settle for a lower rate.
“The large supply is a headache for owners,” said a Tokyo-based executive with a global trading company. Market sources noted that at the beginning of the week, there were four prompt LR1s already in the Persian Gulf. Another 20 LR1s were projected to be available over the next two weeks.
Most of the prompt ships have been fixed away but not before dragging down the rates, sources said.
Cargill was widely heard to have relet one of its time chartered LR1s at w112.5, which was around w10 below the last done rate on the Persian Gulf- Japan route. Rates have since declined further.
To stem the tide, owners are now trying to resist the pressure from charterers but weakness in the LR2s and Medium Range tanker markets is making it difficult.
On a $/mt basis, the cost of moving a 75,000-mt cargo on the Persian Gulf-Japan route on an LR2 vessel is $19.97/mt, according to the latest Platts data.
For the same route, it is more expensive to move a cargo on an LR1 at $21.15/mt, the data showed. For the MRs, it is slightly higher at $21.54/mt, but the gap has narrowed considerably in April to date.
The sluggishness in MR rates has prompted many charterers to load smaller cargoes from West Coast India, the Red Sea and the Persian Gulf.
According to Platts data, three weeks ago the MR rates on the West Coast India-Japan route were at w137.
This week Trafigura was heard to have chartered a ship at w110, bringing the entire MR segment under tremendous pressure.
Global trading companies such as Shell, Total, BP, Vitol and Socar are seeking a combined total of at least a dozen MRs for loading clean products from India, Iran and the Red Sea region, sources said.
LR1 OWNERS OPTIMISTIC OF REBOUND
LR1 owners are still expecting a rebound in rates later this month. Rates for clean tankers move in cycles of short durations of a couple of weeks, said a chartering manager with an LR1 owner.
“We are hiring out our ships for short voyages to or from Pakistan and for loading in India and Middle East and in two weeks when they are [open again for employment], the rates may be much higher,” the manager said.
“Trading and refining companies who relet their time chartered ships or tanker pools can afford to give a discount but it is difficult for owners managing their own ships,” said a chartering executive with a shipping company.
In most cases, pools take their commission calculated on the actual total freight, while owners are keen on higher daily earnings, the executive said.
Market participants also attribute the latest slump in rates to the inherent competition between different sizes of ships.
Daily earnings on LR2s is more than on LR1s and it is therefore understandable that owners are ready to fix ships at lower worldscale rates, said a source with a Japanese commodities trading company.
A round voyage on the Persian Gulf-Japan route will fetch an owner close to $19,000/day for an LR2 compared with $14,000/day for an LR1, excluding the lumpsum $400,000-$500,000 they can earn during a backhaul voyage from South Korea to Singapore, the source said.
Market participants also expect most of the upcoming new-built tonnage that will be delivered later this year to be absorbed in meeting incremental demand created by refinery expansion in the Middle East and Asia.
According to an executive with a global commodities consultancy, Japan’s slowdown in naphtha imports may be offset by higher demand in China.
China’s naphtha imports are projected to rise to around 190,000 b/d in 2016 from around 155,000 b/d last year.