Cascading Costs

The shipping markets have had to face significant regulatory burdens over the last years. Starting with the IMO 2020 regulations 5 years ago, a deluge of new environmental regulations has come into effect. The cost burden that the industry has had to face differs strongly across industries and asset classes, as well as jurisdiction, with the EU imposing the most stringent regulations.

Having a scrubber installed has been a great boon since IMO 2020 came into effect, as the spread between VLSFO and HSFO prices (also known as the Hi-5 spread) has been sizeable. On average, earnings on an Eco VLCC when bunkering in Singapore have been $2.3 million higher per year since 2020. This advantage is lower when bunkering in Rotterdam, falling to below $1.8 million, as the spread between HSFO and VLSFO has been lower here. However, the Hi-5 has been on a declining trend, averaging just over $50/tonne in Rotterdam so far this year, declining from nearly $100/tonne in 2023.

Beginning in 2023, the IMO introduced the Carbon Intensity Indicator (CII) and Energy Efficiency Existing Ship Design Index (EEXI), aimed at improving carbon intensity and vessel efficiency. Importantly, the CII standards could be achieved through operational measures, e.g. by slow steaming, whereas compliance with the EEXI standards was only possible through alterations to the vessel itself. The impact in terms of these measures is difficult to assess, though generally the consensus is that impacts were less than feared. Nonetheless, it is safe to say that costs were incurred, in particular for owners of older ships.

In 2024, the EU emissions trading scheme (ETS) was introduced, applying to all vessels above 5k GT. The EU ETS made shipowners responsible for buying EU allowances to offset a share of their emissions during a voyage which ended and/or began at an EU port. A staggered approach was adopted, with costs increasing each year between 2024 and 2026, and vessels incurring half the offsetting requirement for extra-EU voyages. This has led to significant costs for shipowners, although costs are frequently passed on to charterers. Carrying a crude cargo on an Aframax between Houston and Rotterdam (TD25), incurred an average cost of nearly $150k this year, which will rise to around $200k in 2026 on a round voyage basis.

This year, FuelEU and the Mediterranean Emission Control Area (ECA) were introduced, both aimed at cleaning up the type of fuel used in vessels. The Med ECA requires ships to burn fuel with sulphur content no higher than 0.1% in the Mediterranean from the 1st of May, either requiring a scrubber capable of lowering the sulphur content to this level or for a vessel to burn MGO or other low sulphur fuels (e.g. LNG). With scrubber retrofitting currently costing over $1m on a VLCC, and the cost of using MGO compared to VLSFO as a bunker fuel adding on average over $150/tonne when bunkering in Rotterdam this year, costs aren’t negligible. FuelEU applies to the GHG intensity of the fuel, and the maximum compliant GHG intensity will gradually be lowered over time. The scheme has the same application method as the EU ETS, at 50% for inbound/outbound voyages to EU ports. Fuel Oil/MGO are not compliant unless blended with biofuel, and the standard cost for a TD25 voyage burning VLSFO on an Eco vessel this year is around $35k, rising to over $100k in 2030 and nearly $250k in 2035 based on a round voyage. However, compliance can be pooled across the fleet, so if a fuel with a lower CO2 intensity (e.g. LNG) is burned, this can be used to offset VLSFO usage.

Finally, this April, the IMO Net Zero Framework was established at the 83rd session of the International Maritime Organization’s (IMO) Marine Environment Protection Committee, also known as MEPC83. It introduced a GHG Fuel Intensity (GFI) standard as well as economic measures involving two tier carbon trading system requiring high emitters to offset their CO2 emissions, while rewarding low- or zero-emission ships, as outlined in our report in May. If this framework is adopted at the October 2025 MEPC meeting, vessels will start incurring noncompliance costs from 2028 onwards, with an Eco VLCC burning VLSFO carrying a cargo from the AG to China incurring a cost of over $150k in 2028, which would rise to nearly $1m by 2035. Lower emission ships will be rewarded with surplus units, which can be banked or traded. However, by 2031, LNG, one of the most common lower carbon intensity fuels, will become noncompliant.

In 2026, there will be a brief reprieve when it comes to the introduction of major environmental regulations, though the thresholds for EU ETS will be increased, and the carbon intensity targets of CII will become more stringent. Though significant uncertainty remains, if the IMO Net Zero Framework is adopted in October, one positive takeaway is that the industry will at last have regulatory clarity going forward.

Annual Average Product Price Spreads ($/tonne)

Crude Oil

East

The AG VLCC market saw a sluggish start this week, with limited fresh enquiry and charterers largely opting to operate under the radar, which dampened overall momentum. While a few cargoes were worked early in the week, they did little to significantly shift sentiment or rates. As the week progressed, the subdued pace persisted, with minimal visible activity and little evidence to support rumours of additional fixtures. Freight levels were holding steady until today when a couple of cargoes were quoted to the market both attracting a decent amount of offers which has now led to freight rates taking a hit and levels now returning to numbers previously seen 10+ days ago. Today we are calling AG/China WS61 & AG/USG WS35.

Enquiry on the early side is keeping the AG Suezmax market firm despite the list opening up on later dates. With some early cargoes yet to cover it seems owners will be able to push above last done levels. TD23 we assess at 140 x WS60 via C/C but for later dates charterers will likely be able to chip away at this number. For East runs, owners will be pushing for over 130 x WS120 today, but it is very much in need of a fresh test.

The end of August in Asia was exceptionally busy for Aframaxes, with a flood of 1H September cargoes driving activity. TD14 closed the week around WS15 points higher than where it began, underpinned by a tight tonnage list. Replacement jobs are now commanding strong premiums, reflecting the limited availability. The market has found some legs, with earnings rebounding from year-lows into the mid-$20k/day range. Owners will be hoping the pace continues into next week, while charterers contend with a more balanced but constrained list. Looking ahead, the market could see an uptick in fuel oil stems heading north, supported by recent Chinese tax rebates that may spur additional demand. We enter September assessing Indo/North at 80 x WS122.5.

West Africa

The WAF VLCC market has been largely uneventful this week, with enquiry thin on the ground. Levels have held steady, with owners showing resistance to fixing at last done numbers in the hope of building on last week’s busier spell. So far today there is little reportedly working, the tonnage list remains problematic for charterers and with the USG showing strength we could find levels soon start to improve further. Today we are calling WAF/East WS65.

Enquiry has been rather lacklustre for Suezmaxes in WAF this week and despite a firm market in the Americas charterers will be looking to break 130 x WS107.5 for TD20. Especially with a few committed ballasters still to choose from for those who have loadings south of Nigeria. WAF/East stands at around the usual 10 point premium.

Mediterranean

On Suezmaxes in the Med, TD6 has come under some pressure, and we assess it today at around 135 x WS142.5. That said, there has been heavy resistance in CPC and WS145 was concluded multiple times earlier in the week. Charterers also seem to be taking ships on uncertain itineraries, which is always a sign that things are not as easy as they may appear. Rates to head East remain relatively stable at $5M for Libya/Ningbo via C/C, though we haven’t really seen much done recently with lower volumes heading East from Libya.

Coming back after a bank holiday weekend Aframax owners were taken aback when faced with an overwhelming number of offers charterers were receiving for cargoes.  Naturally when this scenario occurs, freight levels soften and with WS135 showing a 10-point drop, charterers quietly swooped in thereafter. Although levels failed to pick themselves back up, the lists come Friday have transformed dramatically leaving only a reduced selection available now off front-end dates. The rate decline has now halted and if second decade activity flourishes with just a little support from the US then this will undoubtedly be the bottom of this cycle.

US Gulf/Latin America

The US Gulf VLCC market has kept a steady underlying tone this week, with much of the activity taking place quietly under the radar. While the pace of fresh enquiry has been limited, a handful of fixtures in the Americas helped pushed rates higher and whilst this may have been the market playing catch up in terms of earnings it helped to sentiment firm and helped to thin the list out further. Today it has been quiet with many off for a long weekend with Labor Day taking place on Monday. The Brazil export market experienced a rather uneventful week and levels remain flat overall. Hopefully next week activity levels may improve, and we could start to see an uptick in freight levels. Today we are calling USG/China in the region of $8.5m & USG/UKC $3.8m.

North Sea

Aframaxes in the North managed to hold onto the gains made last week with consistent fixing and a short week keeping levels circa WS140. We haven’t seen much of a draw from neighbouring markets with few ballasters leaving but despite this the list has held its own. Things are looking stable as we turn the corner into September with rates holding strong. A fairly standard influx of US tonnage for the window next week but not enough to turn the tide.

Crude Tanker Spot Rates (WS)

Clean Products

East

The expected short-term decline of the LR1s arrived and TC5 started the week off dropping near WS150 after a surprisingly resilient previous week. But ultimately that was shortlived, with LR2s in short supply and a push of cargoes. TC1 didn’t follow suit and we saw it stabilise at WS145 with West rates also firming a touch. By the end of the week TC5 has pushed once again over WS160 mainly due to the pressure on the lR2s and TC1 rising to WS155.

A busy Red Sea market has enhanced perception with some $300k adding to Yanbu/West, and even more where earlier dates were required. Some ambition has crept back into owners’ thoughts and as we enter September rates look likely to hold at least where we now are and potentially see further upside.

A week of two halves in this AG MR market with activity getting busier over the latter half. Rates remained steady for the first half of the week but with undercover fixing starting to tighten the list momentum started to build. This under the radar activity has now started to bubble to surface with a lot of cargoes outstanding as we approach the weekend. This combined with an already tight front end has seen TC12 push into the 170s with TC17 also starting to move. Market firm.

UK Continent

The lure of USG earnings has slightly sidetracked any analysis of the UKC position list which remains very choppy. Transatlantic rates have drifted down to 37 x WS110 last cargo CPP and 37 x ws 105 last cargo ethanol and this feels like a bottom now as one cargo was trying to get WS100 but couldn’t find a willing partner. Worsening weather and a long weekend in the states have put off any owner from ballasting away from the UKC towards the USG but some owners had considered it. We will likely see a slow start to next week with the dollar off, the real ongoing issue is itineraries and delays. Any uptick in rates will likely come from late runners or a tightness in the prompt window as ballast units don’t feature anymore. For the moment there is tonnage depth it’s just that every ship has a story. 

It has been a fairly positive week for Handy owners up in the North as levels close the week at 30 x WS155 for XUKC. The front end of the tonnage list has lacked depth but with the MR market once again struggling to get going there have been some cheaper alternatives on the bigger units for charterers to lean on. Fixing window now out to 5-7 dates with the weekend break coming at a good time to enable a few more ships to firm up on our tonnage lists come Monday. 

Med 

An element of limbo can be seen now with regards to MR rates as a relatively prompt naphtha stem has gone on subs ten points less than last done. Rates have slipped to close the week with last done at 37 x WS120 for a Med-TA option and 37 x WS130 Med-UKC. It does not seem that charterers can be fully regarded as in the driving seat just yet, especially with the attractive USG market inevitably drawing in WAF and Canaries ballasters – limiting charterers options. Nonetheless, with the weekend here and rates slipping it will come as no surprise if charterers hold off to make further gains. 

What started as a steady and slow week for Handies in the Med has closed with a flurry of activity. We have seen rates jump from bottom levels at 30 x WS135 to 30 x WS145 for XMed. An uptick in enquiry causing tonnage to tighten has been the main cause of this rate increase. With plenty of ships on subs, owners will be hopeful that tonnage remains tight in the prompt window going into next week to maintain their bullish sentiment. Time will tell if this will be a short-lived gain for owners.

Clean Tanker Spot Rates (WS)

Dirty Products

Handy

It’s been another quiet week for Handies in NWE as enquiries have struggled to surface. The week started with rate ideas at a steady WS235 but unfortunately, the days went by with little by way of firm enquiry, leaving levels and sentiment to soften. MRs were clipped away for full-stem cargoes, helping to trim fat from the list but idle days rack up for some and positions creep further up the list. We expect to see WS230 tested on next done should enquiry surface early into next week.

The Med has seen under-the-radar and off-market deals rule the roost this week, with owners and charterers alike preferring to keep details from the wider market. The week started with a lengthy looking list with multiple units prompt and free to work. This saw levels soften to WS220 with fixing taking place between here and WS217.5 for most of the front end of the week. By Thursday enquiry had slowed, allowing soft sentiment to creep back in with WS215 beckoning. Come Monday we expect to see spot vessels with additional units soon to open behind. Owners will need a fast start to activity if levels are to find a floor.

MR

MRs in the North have seen enquiry clip away available tonnage, tightening up the list and shoring up levels. Reports of the equivalent of 45xWS167.5 fixed for a UKC run show owners have gained 2.5 points from last done. This week also saw WS160 out of non-Russian Baltics but for a longer voyage and nice flat rate, this has done little to change market ideas. We expect to see a tight list on Monday with few options, natural or ballast, which should favour owners if enquiry surfaces.

It’s been quieter down in the Med this week with little full-stem enquiry to get excited about. The equivalent of WS152.5 XMed was fixed softening levels. A couple of Panamaxes are leaving dry dock in the current fixing window who could consider local MR stems applying further pressure to levels. Looking to next week, we expect to see WS150 tested perhaps lower.

Panamax

Little activity to report for Panamaxes in Europe this week as backhauls Stateside struggle to emerge. A healthy number of units are set to open up within the first decade of September, which could create some competition amongst owners but this has yet to play out. UKCM-TA hovers around the 55 x WS105-110 mark. TD21 has seen a relatively steady week as fixing keeps the list ticking over with levels holding at WS155 as we ran up to Labor Day weekend in the US and we expect this to continue early into next week.

Dirty Product Tanker Spot Rates (WS)

Rates & Bunkers

Clean and Dirty Tanker Spot Market Developments – Spot WS and $/day TCE (a)

wk on wk changeAug 28thAug 21stLast Month*FFA Q3
TD3C VLCC AG-China WS1167565358
TD3C VLCC AG-China TCE $/day12,50051,25038,75028,75035,500
TD20 Suezmax WAF-UKC WS21081068997
TD20 Suezmax WAF-UKC TCE $/day3,75045,75042,00029,75036,250
TD25 Aframax USG-UKC WS21169148125152
TD25 Aframax USG-UKC TCE $/day12,00042,75030,75020,50032,000
TC1 LR2 AG-Japan WS4148144125 
TC1 LR2 AG-Japan TCE $/day4,75035,75031,00023,250
TC18 MR USG-Brazil WS115291176162205
TC18 MR USG-Brazil TCE $/day24,25043,50019,25016,25025,000
TC5 LR1 AG-Japan WS-20150170143155
TC5 LR1 AG-Japan TCE $/day-3,25024,75028,00020,25024,000
TC7 MR Singapore-EC Aus WS25214189197192
TC7 MR Singapore-EC Aus TCE $/day5,50025,75020,25021,25020,750

(a) based on round voyage economics at ‘market’ speed, eco, non-scrubber basis

Bunker Prices ($/tonne)

wk on wk changeAug 28thAug 21stLast Month*
Rotterdam VLSFO  +13480467506
Fujairah VLSFO  +21506485506
Singapore VLSFO  +7500493512
Rotterdam LSMGO  +4647643703

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