Asian LR2 rates surge as demand rises amid wide discount to LR1s

LR2

East of Suez LR2 rates have surged sharply on the back of strong demand that emerged as charterers scrambled to get ships which are still the cheapest available among the main sizes, market participants said.

Around 14-16 LR2s were placed on subjects in the East of Suez region in the last two days, they said.

Ships have been fixed in the w95-w97.5 worldscale range for carrying naphtha on the Persian Gulf to Japan route, sources said.

This is up to w10 points higher than rates at which fixtures were done earlier this week, market participants said.

A host of factors including higher priced LR1s and dirty Aframax tankers, has pushed up demand for LR2s.

“There is a big differential between the LR1 and LR2 rates and so [most] charterers are increasing their cargo sizes to load on the bigger ships,” said a source with a clean tankers owner.

The LR2s typically carry upto 90,000 mt of clean products while LR1s have a capacity to load upto 65,000 mt of the same commodities. Aframaxes carry dirty products of upto 100,000 mt.

So far this month, on the Persian Gulf to Japan route, the LR2s have been trading at a steep discount of upto 25 worldscale points to the LR1s. This is translating into cheaper freight for charterers who are carrying larger cargoes on the LR2s.

On a flat-rate basis, the cost of moving a 75,000-mt cargo on the Persian Gulf-Japan route on an LR2 vessel is $17.62/mt, according to the latest Platts data.

For the same route, it is much costlier to move a cargo on an LR1 at $22.13/mt, the data showed.

This has prompted charterers to shift to the LR2s, resulting in a rebound in their rates.

The spike in rates of Aframaxes, which carry dirty products such as crude and fuel oil, was also influencing the LR2s.

If LR2 owners don’t get the rates they are seeking, they have a option to “turn their ships dirty,” said a source with a tanker owner.

“The Aframax market is too hot now,” said a broker in Singapore. With several Aframaxes being taken on short-term time charter basis, with options of floating storage of fuel oil, rates are increasing sharply.

The short-term time charter of upto three months can fetch an Aframax owner close to $35,000/day. In comparison, if LR1s and LR2s don’t get a backhaul cargo, the daily earnings from a spot Persian Gulf-Japan voyage are around $18,000/day and $21,000/day, according to shipping industry estimates.

Switching to dirty tankers markets entails its own costs and therefore owners of LR2 tankers are instead trying to push up their returns while moving their usual cargoes of clean products, market participants said.

Source: Platts

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