Tuesday, August 4, 2015

Asian VLCC rates tumble but vessel earnings remain robust on cheap bunker fuel

China Shipping Development Orders Four VLCCs

VLCC worldscale rates for voyages on Persian Gulf to East routes have tumbled over the past fortnight and are expected to fall further as the appetite of Asian buyers to import crude wanes, landed storage fills up and refineries undergo maintenance, market participants said Monday.

However the daily earnings of vessel owners remain robust despite the freefall in Worldscale rates due to falling bunker fuel prices, they said.

The key Persian Gulf to Japan Worldscale rate for VLCCs fell each day for eight consecutive trading days to w56 Friday from a year-to-date high of w88.5 on July 21, Platts data showed.

Daily earnings fell to around $53,000 from more than $85,000 over the same period, which market participants said was still quite healthy given earnings fell below $3,000 during a slump in early June 2014.

"Surplus availability of ships is dragging down the rates as tonnage requirement from cargoes isn't large enough," said a chartering source with a Japanese refiner.

Another chartering source with a South Korean refiner said every cargo was receiving 10-11 offers, reflecting the build-up in tonnage.

A VLCC broker in Singapore attributed the slump in rates to lower refinery margins in Asia and weak demand, and in particular to uncertainty over Chinese requirements.

Refinery margins were being hit as oil product prices tumbled in line with crude.

Several refineries that had earlier postponed routine shutdowns now plan to proceed with maintenance, which was already being reflected in the number of VLCC fixtures on Persian Gulf to East routes.

Around 60 VLCC cargoes for Persian Gulf loading in August are covered with tonnage to date, according to broker reports, compared with 90 in the corresponding period of July.

This already translates to a 60-million barrel month-on-month fall in demand, one broker said.

A VLCC typically carries 2 million barrels of crude.

"The huge spike in VLCC rates during the first half of the year was mainly due to the rush for onshore storage, which is now [almost] complete," the broker said.

The sharp fall in crude prices has also prompted refiners to buy only limited volumes in anticipation prices had further to fall.


However, VLCC owners are able to get decent returns even at current worldscale rates because lower crude prices have also pulled down the prices of fuel oil and bunker.

380 CST grade bunker delivered in Singapore was assessed at $284.50/mt Friday, down from $608.50/mt a year earlier, according to Platts data.

"Earnings are good due to cheaper bunker, which usually constitute about 50-60% of the total costs of a voyage, though they will vary with the speed of ships and destination of discharge," said a source with a VLCC owner.

At w55 on the Persian Gulf to South Korea route, worldscale rates are off highs but can still fetch almost $53,000/day, brokers said.

If bunker rates were $600-$650/mt, daily earnings would be almost zero, they said.

Market participants said it because fuel prices were down that shipowners were willing to lower rates rather than remain idle amid excess supply.

The four-week supply of ships is just over 90, said a derivatives trader tracking the VLCC markets.

There are still almost 50 ships available for loading until the end of the second decade of August, the broker said.

The ample supply has ensured that Nigeria's purported ban on more than 100 tankers from operating in its waters failed to support rates.

Some ships that opened in Fujairah early last month would be ready to take another long-haul voyage below last done levels to ensure daily earnings of around $50,000 before winter demand sets in, another dirty tanker broker said, adding PG-East worldscale rates were poised to dip below the w50 mark.

--Sameer C. Mohindru, sameer.mohindru@platts.com
--Edited by Wendy Wells, wendy.wells@platts.com

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