Traders pick cheaper LR2s as freight discount to LR1s widens

LR2

Trading companies are increasingly preferring the bigger LR2 tankers to move naphtha from the Middle East to Asia, as they are currently much cheaper to hire compared with the LR1s, market participants said.

There has been a marked shift towards the LR2s from the LR1s as charterers seize the opportunity to reduce their transportation expenses amid the sharp fall in LR2 rates. Close to 10 LR2s have been chartered this week for moving naphtha cargoes on the Persian Gulf to North Asia routes.

Another three have been taken to do runs within the Persian Gulf and at least two for a PG-UKC voyage, brokers said. In contrast, LR1 fixtures on the PG-Japan route are few and market participants blame it on the freight economics.

There is a piling up of LR2 tonnage in the Persian Gulf, which is dragging down the rates and making it more attractive to load cargoes of larger sizes on ships, market participants said.

The LR2s typically carry clean product cargoes of 75,000 mt-90,000 mt while the LR1s load cargoes of up to 65,000 mt.

“If a charterer has the ability to buy and supply cargoes of larger sizes, at current freight rates they will prefer to use LR2s which will grab market share from the LR1s,” said a source with a clean tankers’ owner.

Since late last month, chartering activity for LR2s had slowed down and excess tonnage in the Persian Gulf widened Worldscale discounts to the LR1s. The cost of moving a 75,000-mt cargo on the PG-Japan route was assessed at $18.73/mt Thursday, compared with $22.39/mt for a 55,000-mt cargo, Platts data showed.

“There are too many prompt LR2s available in the Persian Gulf,” said a Tokyo-based chartering source with a Japanese trading company.

According to the latest position list with sources, there are now at least three LR2s available for prompt loading in the Persian Gulf and another is due to arrive in the next few days, which is yet to be chartered for a voyage.

“There is not much East-to-West movement and ships are getting stuck in the East of Suez region,” said a clean tanker broker in Singapore. A lack of demand to move gasoil on the Middle East to Europe routes has resulted in an increase in the supply of LR2s around the Persian Gulf and Red Sea.

Under the current circumstances, most owners are doing short haul voyages around the Persian Gulf instead of waiting out in the hope of longer PG-East or PG-UKC runs. Naphtha traders smell an opportunity in the lower rates for the LR2s but even the latest bout of chartering on the PG-North Asia routes hasn’t diminished the supply of ships.

“The position list is too heavy and more time is needed to absorb excess tonnage,” a source with the clean tankers’ owner said. Market participants said that even the LR1s are facing a slump in demand, partly due to fewer cargoes moving from the Persian Gulf to Europe and also because of the current preference for LR2s.

Around eight LR1s are still available for loading in the Persian Gulf until November 20, sources said and pointed out that this can put a further downward pressure on the freight rates unless more cargoes seek tonnage anytime soon.

Source: Platts

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