It is a tale of two markets in shipping — where a scramble ahead of Opec’s planned output cuts in January have led to a rise in demand for large oil tankers while a lack of supplies in iron ore and coal are depressing rates for bulk carriers.
Freight rates for very large crude carriers (VLCCs) are at the highest levels since April this year as leading oil producers have been increasing output and exporting crude while prices have jumped on the agreed production cuts.
Producers are “cashing in” and lifting VLCC rates, according to Georgi Slavov at commodity brokers Marex Spectron.
Firmer rates over the past few months for the oil tanker business comes as the shipping industry overall has been suffering from severe overcapacity. Nevertheless, some segments have seen rates fluctuate based on supply and demand for individual commodities.
For oil tanker groups such asFrontline, the year started on a strong note thanks to the crude glut but the market was later hit by supply disruptions and easing refinery margins.
The anticipated output cuts and the crude rally are compounding a tight VLCC market, where a lack of supply of vessels in the Atlantic pushed up rates in November, said shipping brokers. VLCC rates for the key route from the Gulf to Asia have more than tripled since the start of October and are trading at around 90 on the Worldscale measure, the benchmark freight rate unit.
George Lois, senior market analyst at shipbrokers Charles R Weber, says: “It’s looking tight and the market could continue to firm.”
He says Iraq’s crude oil exports from Basrah in December and January was adding to freight demand and the tightness in the market. Active exports from Basrah over the past few months have also supported freight rates and, in January, the loading programme is set to jump to a seven-month high, keeping the market tightness and rates firm, he adds.
In sharp contrast to the VLCC market, rates for capesize vessels, the largest dry bulk ships used for commodities such as iron ore and coal, have been affected by supply constraints of those raw materials.
It has been a roller-coaster ride for the capesize market in 2016, which set a record low in March, as both iron ore and coal prices slumped amid oversupply concerns and fears of a Chinese growth slowdown. The capesize market was subsequently boosted as Beijing’s economic stimulus lifted construction demand which in turn pushed up the iron ore price while the coal market surged thanks to the Chinese output curbs introduced in April.
High demand for tankers and abundant raw material supplies are the crucial ingredients for a freight rate rally. “This clearly hasn’t been the case for capesize rates,” says Mr Slavov.
The capesize market has also been hit by a seasonal slowdown as Chinese buyers finalise their trades ahead of the Chinese new year.
"The market is busy unwinding towards the end of the year," says Henrietta Van Nierkerk, a dry cargo analyst at Clarksons, the shipping services group. “With the Chinese new year also at the end of January, the buying has been done.”
For 2017, both the oil tanker and capesize markets are expected to see the delivery of new ships, which will weigh on the shipping market.
The oil output cut agreement among producers also bodes badly for the tanker market with many of the Gulf producers expected to cut back. “It’s not a very bullish story there,” says Mr Slavov.
“[The supply of tankers] is going to be the biggest hurdle, more so than production cuts,” says Mr Los.
In the VLCC market, the net growth for the fleet is projected at 5 per cent and nearly 11 per cent for Suez Max vessels, which are the next biggest, according to Charles R Weber.
The capesize market in 2016 was supported by the scrapping of oil vessels due to the early market weakness. While more are expected in 2017, they may get cancelled if rates recover, says Ms Van Nierkerk.
“Next year there is enough capacity available to avoid a market that’s going to run away from us,” she says, predicting ”quite a volatile year”.
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