Taxing Times

In less than two months’ time, the shipping industry will for the first-time face emission taxes. For many in the market, the inclusion of shipping in the EU’s Emissions Trading Scheme (ETS) has been a ‘tomorrow problem’, but owners and charterers will soon be fixing voyages which are set to arrive in Europe after the 1st of January, and thus incur an offsetting requirement for the portion of the voyage which falls into the new year.

So, the question now is who pays? It is the ship owner who will be liable for reporting and offsetting the emissions. Under the existing monitoring, reporting and verification (MRV) system, it has been the DOC holder (i.e. the shipmanager) who has been responsible for reporting emissions to the EU. However, this obligation now shifts to the shipowner unless there is an explicit contractual agreement to make the DOC holder responsible. Simultaneously, the owner will be responsible for acquiring and surrendering EUAs. Therefore, a mandatory carbon account needs to be established where EUAs can be stored, transferred to and from other parties and ultimately surrendered to the relevant authority.

Despite the shipowner being responsible, it is still being debated how the cost will be ‘passed on’ to the charterer. Under a time charter, it is generally accepted that the charterer will foot the bill; however, for spot voyages it is more complicated. Owners are likely to prefer submitting a claim upon completion of the voyage to charterers for settlement. Yet, charterers may prefer to not have it specified as an additional cost, leaving owners to attempt to recover the cost through higher freight rates (or lower profitability). Some charterers may also prefer to transfer EUAs to the owner’s carbon account, instead of a cash settlement. In the end, the standard industry practice which emerges may be a result of who (owners or charterers) has market power upon the implementation of the rules. It is also debateable whether ballast legs will be compensated. As owners will need to pay for both inbound and outbound voyages, vessels with long ballasts into an EU port will have a greater ETS liability, making them less competitive compared to vessels with shorter ballasts, thus trading dynamics are likely to be impacted.

The scope of the scheme is expected to be largely unchanged from the draft text released earlier this year, as covered in previous Gibson reports. The ETS will be phased in over three years (see chart) with voyages in 2024 having to surrender allowances for 20% on voyages from non-EU port to EU port, and 40% for intra EU trade, rising to 50% and 100% respectively by 2026. Some changes are, however, expected. It was reported this week that loopholes for container ships calling at transhipment ports just outside the European Union are said to have been introduced in the final text, and more changes are likely. Under the current rules, STS operations outside ports are not subject to the scheme and could be used to avoid an offsetting liability. The EU has stated that evasive practices will also be closely monitored and addressed where appropriate.

The emergence and standardisation of trading practices around the ETS is likely to take several months to emerge. However, it is not the end of the regulatory journey. Just 12 months later, the FuelEU Maritime initiative will come into force requiring the GHG intensity of the fuel used on board to decline by 2% on a well to wake basis – for many requiring the use of biofuels. More on that later this month.

EU ETS Offsetting Requirement (%)

Crude Oil

Middle East

Overall, it was another good week on the VLCC front as Charterers moved to cover mid-decade stems against a shrinking tonnage list after the rush to ballast West. The Market has now quietened down as we await the arrival of last decades cargoes and it is likely that the industry event in Dubai may impact activity certainly at the beginning of next week. Today we would expect 270,000mt AG/China run to fetch in the region of ws 71 and a 280,000mt AG/USG run to go for at least the ws 37 level.

The AG has been rather sluggish in terms of enquiry with very little market enquiry throughout the week. Despite the lack of enquiry, Owners still have ideas around 140,000mt x ws 90. VLCCs are starting to show cracks but aren’t looking just yet to cap the Suezmaxes and rates are around 130,000mt x ws 125 today for AG/East.

West Africa

WAF rates on VLCC’s firmed this week mainly in reaction to the buoyant Suezmax market and Owners sentiment remains strong despite less activity towards the end of the week. The outlook next week is somewhat uncertain, but we could see a softening with lots of people travelling resulting in weaker demand and combined with a plethora of eastern ballasters entering the fray, Charterers will be hopeful of securing cheaper freight. In today’s market we are expecting a WAF/China run to fix at the ws 72.5 level.

The Suezmax markets in West Africa, have come under some pressure after the craziness of prompt replacements last week. For TD20 today we estimate at 130,000mt x ws 160, though with the weather trying its best to delay every ship we will likely see some upwards pressure next week.

Mediterranean

The market in the Med remains steady with delays going up in the Turkish straits we estimate TD6 today at 135,000mt x ws 170. Cargoes heading East today will likely be around the $5.9M mark for Libya/Ningbo. Weather in the region has potential to cause a stir next week and many will be checking their weather apps over the weekend.

A week of consistent activity for Aframaxes and a week ending in bad weather has put the cat amongst the pigeons. Rates steadily rose with CPC rates moving from the ws 250 levels up to ws 277.5 and more on the cards at the close for tight early dates. Cross Med also moved up and ws 270 has been reported for a relatively prompt Ceyhan replacement. With bad weather brewing the going remains firm.

US Gulf/Latin America

VLCC rates seemed to have peaked this week after the recent upturn and we saw a slight softening towards the end of the week as we saw a good number of ships failing subjects. However, Owners will remain confident that the market can firm again as we expect a busy December programme and we also expect a USG / China run will fix in the region of just $10.25M on today’s market while a Brazil/China run is paying around ws 71 level.

The USG has rocketed a bit with levels levelling out after riding some waves. Caribs/Up now trades at ws 262.5 levels and things seem to have settled for the time being. Some this side of the pond are still eyeing up what ballasts look lucrative but come next week, locals might hold them to European trading.

North Sea

The North Sea has had a bit of tempered week with little to cause much excitement. Rates were tested and despite recent bad weather, tonnage has been readily available. Rates are trading at wd 197.5 and don’t look set to move in the near future. There are some obvious ballasters on the early side who have been delayed due to weather but this won’t be significant enough to curb the list and change current sentiment.

Crude Tanker Spot Rates (WS)

Clean Products

East

LR2s have been very quiet this week – publicly quoted enquiry has been lacklustre – and we look circa 20 cargoes short for 1st half month. Rates have therefore corrected down to $3.9m AG/UKC, with full optionality – and 75 x ws 145 last done on Naphtha and likely easily repeated. The LR1s have traded pretty flat – relatively active in comparison, unsurprising given a favourable dollar/tonne. $3.275m on subs for AG/UKC, and 55 x ws 155 repeated – most agreeing that we have hit the bottom. Last done will continue until we see enough volume to bounce.

The Far East MR has gone through another grim week. The local demand in the current window is sluggish and arb demand is just muted. TC11 dropped from 750k to 600k. Earnings in North Asia have fallen to mid-high teens.  Singapore market is worse, as tonnage is heavily building on in the front. Some ships have ballasted to AG or went to palm trade but it could not change the big picture. TC7 plunged to ws 167.5, which is at least ws 30 points drop w-t-w.

With Bahri beginning on Monday, there will be plenty of direct and off-market fixing, which keeps Owners feeling favoured, and offers Charterers an opportunity to keep any progression in rates minimised.

The MRs have suffered another week, where the cargo base has not been enough to swing sentiment back in the Owners’ favour despite all hopes being pinned on a pre-Bahri fixing rush. We close the week as a result, with ws 210 on subs for TC17; however, there is some resistance to a further drop. TC12 remains largely untested, while those at the top of the list are looking for short runs to fill this level.  Adding fuel to the fire for weaker sentiment, we have been through the slowdown in the East to a point where prompt MRs are committing to ballast to the AG.

Mediterranean

All in all, it’s been a steady week for the Handies here in the Mediterranean with rates trading sideways for the most part. Lackluster enquiry levels for the most part of this week has seen X-Med trade at the 30,000mt x ws 195 mark throughout with Non-Russian Black Sea tracking at a +25 point premium. However, as we approach the weekend bad weather across the Western Med has been throwing itineraries up in the air and with this expected to continue all weekend we could see some movement come Monday.

Finally, to the Med MR market where rates have slowly managed to build despite enquiry levels being on the slower side. 37,000mt x ws 165 Med/TA was achieved on Monday but as the week has progressed we have seen TC2 firm up and the Med has started to follow suit. Last done Med/TA is currently at the 37,000mt x ws 175 mark but with TC2 on subs at 37,000mt x ws 200 expect some bullish ideas from Med Owners before the week is out.

UK Continent 

A positive week for the Owning fraternity as despite a relatively slow level of market cargoes midweek, rates have been able to build and build with some direct deals clearing our list out and with some poor weather ahead, Owners take the advantage. TC2 now shifts into the ws 200 mark with our tonnage list looking rather thin off the front end of dates, any outstanding cargoes will face some bullish ideas. Once we reach mid-month dates we could expect things to cool a touch with incoming tonnage, but for now Owners continue to enjoy their position.

A fresh Monday morning Handy tonnage lists showed a healthy amount of supply available for Charterers in NWE and with enquiry lacking, levels softened to 30,000mt x ws 165 for X-UKC. Bad weather has seen some ships get tied up in delays which has meant Owners have been able to hold the line around here and with MRs firming come Friday with TC2 at 37,000mt x ws 200, handy Owners will be hopeful there will be a domino effect here. Poised.

Clean Tanker Spot Rates (WS)

Dirty Products

Handy

Safe, workable ships in the North have remained relatively scarce throughout, keeping rates trading in the ws 300-305 levels. A couple of failures on Friday should take the wind out of the Owners’ sails, and we should expect levels to trade sideways from early next week.

In the Med, the weather has played a factor and in turn we have already seen enquiry up to mid-month. Reports of replacement jobs coupled with uncertain itineraries will see Owners try and push this market to the ws 325 levels. The Monday morning position list will prove key.    

MR

There is no change to the North as this sector continues to offer little in terms of full stem enquiry. Owners with MR units in play have opted to take part in cargoes to avoid idle days. Despite full stem enquiry being slow, Owners’ confidence remains high as surrounding markets continue to firm and MRs continue to find employment (mainly on part cargo basis).

In the Med, 45kt enquiry has been active, but rates have remained firmly under the radar, resulting in a disparity among Owners regarding true market levels. Certain Owners haven’t held back from taking part cargoes, which has kept availability tight throughout the week. If this ongoing trend continues, expect rates to push on up following a fresh test whilst the Handies continue to trade firm. 

Panamax

Taking price points from the surrounding Aframax market, Panamax’s are left estimating where to aim for upon the next test given, the bar has been raised again this week. That said, there hasn’t been much uptake in the demand from Charterers with a number of units coming up in need of fixing this side of the Atlantic.   Charterers should therefore be able to navigate this sector carefully and find comparatively attractive value moving 55kt instead of 80kt – Plus heat is included in this sector.

Dirty Product Tanker Spot Rates (WS)

Rates & Bunkers

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

wk on wk changeNov 2ndOct 26thLast Month*FFA Q4
TD3C VLCC AG-China WS+1672563762
TD3C VLCC AG-China TCE $/day+20,50053,00032,5007,25039,500
TD20 Suezmax WAF-UKC WS+1616114573117
TD20 Suezmax WAF-UKC TCE $/day+11,50081,25069,75020,75051,000
TD25 Aframax USG-UKC WS-6259265115204
TD25 Aframax USG-UKC TCE $/day-2,00078,50080,50020,00056,250
TC1 LR2 AG-Japan WS-27146173140
TC1 LR2 AG-Japan TCE $/day-12,00031,25043,25031,000
TC18 MR USG-Brazil WS+9197199243214
TC18 MR USG-Brazil TCE $/day+25024,50024,25034,50028,500
TC5 LR1 AG-Japan WS-15155170156169
TC5 LR1 AG-Japan TCE $/day-5,25023,00028,25025,25027,500
TC7 MR Singapore-EC Aus WS-44185229244228
TC7 MR Singapore-EC Aus TCE $/day-7,25016,75024,00030,00025,500

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

Bunker Price s ($/tonne)

wk on wk changeNov 2ndOct 26thLast Month*
Rotterdam VLSFO  -5585590601
Fujairah VLSFO  +35681646655
Singapore VLSFO  +22687665671
Rotterdam LSMGO  +1857856893

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