Section 301 imminent

In April, the Office of the United States Trade Representative (USTR) published their much-anticipated action plan to address alleged Chinese maritime dominance. Few further details have come to light since, and significant uncertainty remains around details of the policy. The measures are scheduled to come into effect soon, on the 14th of October, after a phase in period of 180 days.

For a more detailed account of the policy, please refer to our report from April. Briefly, fees are planned to be imposed for making port calls in the US based on whether a vessel is Chinese built or Chinese owned or operated. For a Chinese owned or operated vessel, an initial tariff of $50 per net tonne (NT) per port call or rotation of US port calls applies, with no exemptions, increasing over the next three years. These vessels would in effect be excluded from the US market, as the costs incurred would make these vessels uncompetitive.

For Chinese built, but not owned or operated vessels, the measures are more complex as various exemptions may apply. Regardless of vessel size, if the tanker arrives in ballast, the voyage is less than 2000nm, the vessel is less than 55,000 dwt, or it is US beneficially owned, no fees will apply. Note that the 80,000 dwt bulk capacity threshold exemption hasn’t been clarified, though it is mostly interpreted as applying only to dry bulk vessels below 80,000 dwt. Provided none of these exemptions apply, US port calls on a Chinese built vessel would be impacted, and a fee of $18/NT is set which is also set to increase over the next three years. Significant uncertainty remains around details, including any potential costs incurred or avoided by re-berthing or discharging via STS.

As it stands, vessels subject to Chinese lease financing are expected to be classified as Chinese owned, and here a significant impact has already been felt. Substantial efforts to diversify away from facilities with Chinese lessors have been seen in recent months, as lessors are facing early repayments and lower demand. Law firms are exploring structures to retain Chinese lease facilities and circumvent the Section 301 regulations, though a readily applicable solution has yet to be found.

The total numbers of vessels affected depends on what definition is used for Chinese owned or operated. If the definition is applied liberally, around 19% of the tanker fleet greater than 25,000 dwt are Chinese owned or operated, though most of these operate East of Suez and are unlikely to trade to the US. We are currently counting over 500 tankers on the water above 55,000 dwt which are Chinese built but not Chinese owned or operated, of which again most are trading East of Suez. Note that these are indicative numbers, as the USTR’s definition of owner or operator of a vessel is yet to be fully clarified. Further, nearly 70% of the current tanker orderbook greater than 25,000 dwt is on order in China.

Nearly 90% of clean trade into the US is carried on vessels below 55,000 dwt and is thus exempt. US imports of clean products on vessels over 55,000 dwt have totalled less than 100kbd so far this year, most of which from ports further than 2000nm distance, a volume that can be replaced. On the dirty side, the US imports significant volumes of Crude/DPP on vessels over 55,000 dwt from areas more than 2000nm from US ports, including from the parts of Latin America such as Brazil and Argentina. These will all face fees if carried on Chinese built vessels.

There is significant uncertainty around who will foot the bill, with reports of both charterers and shipowners adding provisions to cover potential costs. In cases where vessel availability is tight, yet a Chinese built vessel is available, instances have been recorded where charterers have been forced to compensate owners. In turn, weaker markets may see owners take the hit, if other trading possibilities prove less lucrative. Consequently, fixtures enabling Chinese linked ships to leave the US and resume trading elsewhere have been noted. We are further observing discounts for TCs on Chinese owned/operated ships.

So far, the full impact of USTR Section 301 is difficult to ascertain due to a lack of clarity on the many open questions remaining. However, if implemented in its current form, it seems clear that Chinese built tankers above 55,000 dwt will be less likely to trade to the US. Further, Chinese owned and operated vessels will be forced to steer clear of US trade. While the share of Chinese built, owned or operated ships is significant, it would appear there are enough ships without a Chinese connection to service US demand. However, volatility in freight rates cannot be ruled out as supply chains adjust to the new rules.

Share of Chinese built or owned/operated vessels by asset class (%)

Crude Oil

East

VLCC freight rates in the AG market remained strong throughout the week, with owners holding firm amid healthy levels of enquiry. Early in the week, big numbers continued to be paid, particularly as charterers continued to step out with first decade stems, supporting bullish sentiment. A steady flow of activity was observed midweek, with notable fixtures concluding at WS105, reinforcing the market’s strength. However, as the week progressed, enquiry began to taper off, and by week’s end, the pace had noticeably slowed. Freight levels currently hold steady at around WS105, and looking ahead to next week, we could find charterers work more under the radar picking tonnage off to cool the market. We are currently calling AG/China at 270kt x WS105 and AG/USG at 280kt x WS58.

Rates in the East have pushed up after a long stagnant period on Suezmaxes. Rates to head West today owners will be looking to push over 140 x WS65 via C/C and it seems likely that they may achieve their ambitions. Rates going East are also much stronger off the back of a very firm VLCC market and owners will be pushing for over 130 x WS140 today.

Sentiment on Aframaxes in Asia firmed toward the end of the week on the back of stronger fundamentals. Local enquiries, coupled with firm AG and Vancouver markets, supported owners’ positions as tonnage was pulled away from the region. This left charterers contending with a tighter list outside the natural fixing window in the Indo market. Meanwhile, a softer CPP market encouraged some LR2 owners to compete for condensate stems ex-Oz, given favourable economics. This has provided Aframax owners with greater flexibility in choosing their employment direction, as earnings across adjacent markets now trend on a similar trajectory. We head into the new week with steady demand and a firmer Indo Aframax market, where owners are expected to target earnings in the high-$20,000/day range. We assess Indo/North 80 x WS130.

West Africa

The West Africa VLCC market has seen a firm and active week, supported by a tight tonnage list following a busy period. With a steady flow of enquiry and vessels fixing away to other regions like the USG and AG, availability remains limited, particularly within the natural fixing window. Although some fixing and failing has been observed, sentiment has stayed positive, and freight levels have held firm — mirroring trends in the adjacent markets. We are currently rating WAF/China at WS96.5 today.

West African Suezmaxes has also firmed up this week but owners do seem to be struggling to push rates over 130 x WS115, early trading next week will be key here as an active start to the week will likely see owners continue to push up rates. The premium to go East is probably around the WS7.5 mark today, though there aren’t many owners putting their hand up to go East today and charterers may struggle to keep it below WS10 points.

Mediterranean

Suezmaxes in the Med have been a very unexciting to report on with TD6 at135 x WS142.5 becoming almost a price tag for the run being repeated countless times. With such good returns available owners are hesitant to risk missing their dates. Rates to head East have also pushed up with no real obvious candidates for the run, the market needs a test, but we estimate $5.4M for Libya/Ningbo via C/C.

The forward fixing in the Mediterranean last week gave Aframax owners a reason to be optimistic this week with a much thinner list giving a warmer feel to proceedings. A steady cargo flow and some replacement activity allowed Ceyhan freight rates to move to WS135 and then WS140 levels were the going rate by the close. Libyan cargo with smaller flats were a different kettle of fish though with WS150 levels being concluded for these runs. CPC activity remains hard to find as cargo flow remains low for the next month on this size although there are going to be one or two cargoes to be worked outside of own program tonnage in the month. Rates to the States will become more of interest as Chinese tonnage is generally avoided but for the time being there are enough safe units to keep levels in the WS80-85 zone from the Med to the Gulf.

US Gulf/Latin America

The VLCC Atlantic market experienced a strong and fairly active week, particularly in the USG, where sentiment and freight rates remained firm. A tight and challenging tonnage list made it difficult for charterers to secure cover, contributing to upward pressure on rates. In the middle of the week freight levels in the USG saw a notable step up, pushing past the $12.0M mark, bringing TCEs more in line with the adjacent markets. Owners maintained the upper hand throughout the week, with momentum generally in their favour, although some recent failings slightly dampened sentiment toward the end. We are currently assessing USG/China at $12.45m and USG/UKC at $5.5m.

North Sea

A slightly stronger Aframax market helped by the US volatility. Levels have achieved WS130 + but in reality, there doesn’t seem to be a huge amount to push the market further. Neighbouring markets are now feeling the pressure somewhat and any further gains may find it an uphill struggle.

Crude Tanker Spot Rates (WS)

Clean Products

East

This week felt like Niagara Falls, a falling torrent across the product market, with the exception being LR1s, which held out better than expected. Charterers played it well, while owners got washed out. The slide started last week with MRs, then LR2s tumbled. LR1s held out remarkably well, but once the LR2s collapsed it was only a matter of time. The LR1/2 spread blew out from almost levelled to 35 points, and TC5 eased 10 points to WS145 mid-week. Even so, LR1s still look decent compared to LR2s. Charterers quietly picked off LR2s in private deals, chipping away fixture by fixture until TC1 ended the week on subs at WS120. Westbound was subdued for much of the week until charterers made their move. Then the correction came hard. TC20 shaved off $500k, on subs at $3.45m KWT/UKC. LR1s westbound showed resilience and held at $2.95m, but with the LR1/LR2 spread narrowed to just $500k versus a 3-year average of $800k, charterers will likely focus LR2s with better $/mt economics. Looking ahead, MRs and LR2s may be close to finding a floor, where LR1s still face some further downside.

Much of the same in this AG MR market this week with rates remaining weak due to a healthy supply of tonnage. TC17 started the week at the 35 x WS180 mark with TC12 at 35 x WS130. Sluggish enquiry at the start of the week saw the pressure remain on levels and as a result TC17 now sits at 35 x WS165 which is an annual low. However, over the backend of the week off market activity has picked up and as a result the list is starting to be cleared out. This will need to be further improved on next week if rates are to pick themselves off the floor they have now found. Market bottomed.

UK Continent

After weeks of MR rates grinding along a perceived bottom, tonnage displacement away from the UKC, some bad delays and a steady flow of new cargoes has seen rates push to 37 x WS130 TA and WS150 to WAF and Brazil. It is interesting to note that this week has seen the full smorgasbord of stems with Brazil, WAF, Argentina, Med, TA and XUKC all featuring. This has meant owners can be pickier about the direction they want to go based on future round-trip desires. Rates could have pushed up further, but charterers have remained calm based on lots of false starts in recent weeks. The UKC has certainly become a little more interesting this week and the last decade of the month is always busier, so the scene is set for some skirmishes next week.  

A positive week ends for the Handy owners plying their trade in the UKC with rates improving and a relatively tight tonnage list on our hands now. With weather delays hindering charterers full options, and a few failures on our hands, we saw pressure build on outstanding cargoes with 30 x WS175 being seen (although now failed). Moving into next week expect owners to continue with positivity with rates somewhere around the 30 x WS160-165 mark now. 

Med 

A subdued start to the week has evolved into a fairly active market for MRs in the Med. We saw a nicely restocked list slowly get worked through to tighten the front end up. Moreover, market movement in the North has been a key factor in determining next done usually pulling Med-TA/UKC rates into parity. Owners have been optimistic in pushing rates up where we now sit at 37 x WS130 requiring some testing. Eyes on how the list restocks on Monday. 

A tale of two halves this week for Handies in the Med. At the start rates were stuck to the floor at 30 x WS135 levels. However, as the week went on, we saw the list tighten and tonnage congregate in the East Med and with several grade sensitive stems also, owners’ opportunity to exploit arose. We now sit at 30 x WS155 going into the weekend with owners closely watching how much enquiry comes about at the start of next week. Charterers will be hoping the list restocks nicely putting to bed any further positive momentum. The questions to ask will be whether we see rates correct down or if there is enough activity to continue firming.

Clean Tanker Spot Rates (WS)

Dirty Products

Handy

Enquiry surfaced in the market early on into the week, this saw levels soften to WS215 and WS217.5 respectively. These rates were repeated as the week progressed leaving owners in a position to push onward early into next week of enquiry surfaces early.

Activity in the Med got off to a healthy start against the back drop of a long list with plenty of availability. Units were clipped away from Monday onwards and relets went into programme and tonnage build up began to ease. Rates were tested down at WS180 and these rates repeated before bouncing back up the WS185 where we feel owners will repeat early into next week.

MR

A quiet week for full-stem activity once again on the whole. In the UKC WS155 was failed then fixed for a XUKC stem steadying the market here for now. In the Med, owners found regular employment via handy/part cargoes leaving the market awaiting a fresh test basis 45kt. We expect to see WS150-155 tested on next done.

Panamax

Panamaxes overall have seen a slower week over in the USG as ideas slowly trend towards WS150 for TD21 as units remain there to work. Over in the UKC a handful of units remain workable and with rates UKC-USG hoovering around the WS115-120 mark for now.

Dirty Product Tanker Spot Rates (WS)

Rates & Bunkers

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

wk on wk changeSep 18thSep 11thLast Month*FFA Q3
TD3C VLCC AG-China WS18105876764
TD3C VLCC AG-China TCE $/day23,500100,50077,00051,25045,000
TD20 Suezmax WAF-UKC WS4116112108101
TD20 Suezmax WAF-UKC TCE $/day2,50051,00048,50045,75038,750
TD25 Aframax USG-UKC WS-16161176169152
TD25 Aframax USG-UKC TCE $/day-5,25039,50044,75042,75032,000
TC1 LR2 AG-Japan WS-24119143148 
TC1 LR2 AG-Japan TCE $/day-8,25026,00034,25035,750
TC18 MR USG-Brazil WS-19193212291208
TC18 MR USG-Brazil TCE $/day-3,50024,50028,00043,50025,500
TC5 LR1 AG-Japan WS-8146154150154
TC5 LR1 AG-Japan TCE $/day-1,75024,25026,00024,75024,250
TC7 MR Singapore-EC Aus WS-9201210214200
TC7 MR Singapore-EC Aus TCE $/day-1,25023,75025,00025,75022,500

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

Bunker Prices ($/tonne)

wk on wk changeSep 18thSep 11thLast Month*
Rotterdam VLSFO  -5456461480
Fujairah VLSFO  -1483484506
Singapore VLSFO  +6486480500
Rotterdam LSMGO  +21672651647

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