This should theoretically be a heady and turbulent time for very large crude carrier (VLCC) rates, given escalating geopolitical tensions in the Strait of Hormuz. VLCCs, which carry two million barrels of crude oil each, are the workhorse tankers of the Middle East export trade.
But it’s not as volatile as one might think, at least not yet. There was a bump up in rates following the attacks on tankers in June in the Gulf of Oman. However, the pattern did not repeat itself after the Iranian seizure of the U.K.-flagged tanker Stena Impero on July 19.
According to data from Clarksons Platou Securities, VLCC rates as of July 24 were $14,800 per day, essentially flat week-on-week (up 0.8 percent) and down 44 percent month-on-month.
Commenting on crude oil tanker chartering activity in recent weeks, Deutsche Bank transportation analyst Amit Mehrotra said that “Middle East fixtures [charters] have been light” and crude flows out of the Middle East have been “sluggish.”
To gauge Middle East Gulf demand, FreightWaves asked VesselsValue, a U.K.-based shipping data and analytics company, for data on tanker ballasting to the region. If commercial managers believe there will be demand for spot deals in a particular area, they will unload their previous cargo and ‘ballast’ (sail empty) to that region, in hopes of securing new employment.
VesselsValue data shows that from June 1 through July 23, VLCC ballast voyages to the Middle East Gulf were down 3 percent compared to the same period last year.
The generally held theory on how Hormuz tensions increase VLCC rates in the near-term is that cargo shippers need to pay more to entice vessels to take the risk to transit the Strait of Hormuz. But this logic assumes that demand from cargo shippers has remained constant and that demand is not falling.
VesselsValue senior analyst Court Smith implied to FreightWaves that the decline in the number of VLCCs ballasting to the Middle East Gulf may not necessarily be because of the Hormuz safety risks, but rather, because there is a perception among commercial managers that there is more money to be made elsewhere.
He cited “the idea of correlation, not causation” and pointed out that “earnings are very soft in the Middle East Gulf right now.” According to Smith, “Empty ships may decide to relocate to other load regions such as West Africa, Brazil or the U.S. Gulf just because of low earnings expectations [in the Middle East Gulf] – although additional risk would certainly tip some controllers’ decision as well.”
Looking beyond the current market toward future VLCC rates, Wall Street analysts generally voice optimism – and yet, when you look more closely at the rate revisions in their latest quarterly outlooks, there’s clearly a pullback in expectations.
In his quarterly tanker-sector outlook published on July 23, Evercore ISI analyst Jon Chappell kept his 2020 VLCC rate outlook unchanged at $35,000 per day, but brought his full-year 2019 estimate down from $26,000 per day to $24,000 per day.
When Jefferies analyst Randy Giveans issued his quarterly outlook on July 19, he emphasized, “We still believe the sector will firm.” Nevertheless, he brought his full-year 2019 VLCC rate forecast (for VLCCs with non-‘eco’ designs) down from $27,750 per day to $25,250 per day. Giveans kept his 2020 non-eco VLCC rate outlook unchanged at $32,000 per day.
Also on July 19, Stifel analyst Ben Nolan released his quarterly outlook. He brought his 2019 VLCC rate estimate down from $30,000 per day to $28,500 per day, while keeping his 2020 estimate unchanged at $35,000 per day.
Public companies with spot VLCC exposure: Euronav (NYSE: EURN), DHT (NYSE: DHT), Frontline (NYSE: FRO), International Seaways (NYSE: INSW)
Capesize rates take a tumble
It was all going so perfectly well for Capesizes – dry bulk vessels with capacity of 100,000 deadweight tons (DWT) or more – due to surging Atlantic Basin demand from Brazilian iron-ore exports to China.
On July 22, Clarksons Platou Securities reported that Capesize rates had reached $33,000 per day. The Baltic Capesize Index on that day hit a level not seen since 2010.
Then things went downhill. It’s too early to say whether it was a bump in the road or more serious. By July 24, Capesize rates were down to $28,500 per day, a 14 percent plunge from just two days prior.
The drop in the physical market was mirrored in the ‘paper’ futures market for forward freight agreements (FFAs). It was actually much worse on paper, which raises questions going forward.
Clarksons Platou Securities analyst Frode Mørkedal said in a client note on July 24, “Sentiment in the FFA market has weakened with the fall in spot rates, trading down heavily at the front end of the curve, particularly for Capesizes with fourth quarter contracts declining around $1,200 per day to $21,000 per day this morning.”
Public companies with spot Capesize spot exposure: Genco Shipping & Trading (NYSE: GNK), Golden Ocean (NASDAQ: GOGL), Star Bulk (NASDAQ: SBLK), Safe Bulkers (NYSE: SB), Seanergy (NASDAQ: SHIP)
Whither trans-Pacific demand?
In the container shipping sector, it’s getting close to the point where it will be clearer whether Asia-U.S. trade volumes are going to sink or swim. If things don’t improve in early August, it’s genuinely time to get worried.
The Freightos Baltic Daily Index (China North America West) gauges the price to ship a 40-foot container across the Pacific Ocean. It is down 7 percent year-on-year and is currently closely aligned with the Freightos global rate average (FBX.GLBL), which is down 6 percent year-on-year.
China-North America rates, which are considered a proxy for container shipping demand between China and the U.S., jumped well above the global average in the second half of last year as U.S. importers raced to beat tariff deadlines.
Going forward, freight rates on the China-to-U.S. route will depend on the outcome of trade negotiations. Unfortunately for shippers hoping for a positive outcome, these negotiations became more complicated on July 22, when the U.S. sanctioned a Chinese state-controlled buyer of Iranian crude oil.
Public shipping companies with exposure to spot box shipping rates: Maersk Line (Copenhagen: MAERB.C.IX), Hapag-Lloyd (Frankfurt: HLAG.D.IX), Matson (NYSE: MATX)
Editor’s note: Freightos has a business agreement with FreightWaves that includes editorial coverage.