How OPEC’s coronavirus cuts affect ocean shipping

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The market expected a new coronavirus-induced 1 million-barrel-per-day (b/d) production cut from OPEC+, the coalition of OPEC and participating non-OPEC nations. What it got on Thursday was a much bigger proposed cut of 1.5 million b/d.

Underscoring the severity of the demand problem, crude prices fell by 2% on Thursday despite the OPEC news.

How do escalating crude-oil production cuts affect ocean shipping? It depends on the sector.

Crude-tanker demand

There are those who believe OPEC cuts are a plus for crude tankers because such reductions are replaced by U.S. exports to Asia, which travel longer distances and soak up more capacity. That is the minority view, however.

“The global crude-tanker market is around 40 million b/d, so the impact of a 1.5 million-b/d cut — 4% of seaborne volumes — is especially challenging for crude-tanker names,” said Stifel analyst Ben Nolan. “The OPEC cut is a negative,” echoed Jefferies analyst Randy Giveans.

U.S. crude exports are indeed very strong. According to data from the Energy Information Administration (EIA), the U.S. exported a record 3 million b/d in full-year 2019 — 3.7 million b/d in the month of December.

The optimistic view on OPEC cuts assumes that U.S. exports shipped aboard VLCCs (very large crude carriers, capable of carrying 2 million barrels of crude oil) from the Gulf of Mexico to Asia via the Cape of Good Hope replace VLCCs loading in the Middle East.

However, the EIA data shows that much of the incremental export growth is going to Europe. If OPEC cuts offset demand declines in Asia and U.S. exports flow more to Europe than to Asia, that’s not positive for crude-tanker demand.

During the call with analysts on Wednesday, International Seaways (NYSE: INSW) CEO Lois Zabrocky confirmed that “a lot [of U.S. Gulf crude exports] is going out on Aframaxes and Suezmaxes at the moment.” Aframaxes carry 750,000 barrels and Suezmaxes carry 1 million barrels; these vessel types are largely used for shorter-haul exports to Europe and Latin America.

Another point was raised by Frode Mørkedal, managing director of research at Clarksons Platou Securities. He acknowledged that “OPEC cuts are likely negative on the margin,” but he noted that if there were no cuts, and oil prices fell even more steeply due to coronavirus, it would hit U.S. shale producers and curtail exports. “The bottom line is … the potential slowdown in U.S. crude output if prices were to collapse would be much worse for tankers [than OPEC+ cuts].”

Container liner costs

To the extent OPEC+ is able to stabilize crude oil prices, it’s a negative for container lines.

Container carriers have been contending with higher fuel costs due to the IMO 2020 rule, which requires vessels without exhaust-gas scrubbers to switch from cheaper 3.5% sulfur heavy fuel oil (HFO) to more expensive 0.5% sulfur fuel known as very low sulfur fuel oil (VLSFO).

The large majority of container ships do not yet have scrubbers installed, and those scheduled to install them are seeing timetables pushed back as a result of coronavirus-induced delays at Chinese yards.

When Maersk reported its quarterly results on Feb. 20, the company’s CEO, Soren Skou, noted that the company had been able to pass along the costs of IMO 2020 implementation to cargo shippers through both contracts and spot pricing. But he also conceded that the market was much weaker after Chinese New Year (due to the coronavirus), so it remains to be seen whether the costs could continue to be passed along.

Ship & Bunker estimated that as of Wednesday, the global average for VLSFO was $497 per ton. A year prior, HFO was priced at $471.50, equating to a year-over-year IMO 2020-related cost increase of 5%.

That is minuscule versus what it was just a few months ago. According to Ship & Bunker pricing data, the global average price of VLSFO was $686.50 per ton on Jan. 8. A year before, the price of HFO was $417.50, equating to a year-over-year IMO 2020-related cost increase of 64%.

The reason the cost increase slumped from 64% to 5% is that the price of VLSFO (based on the global average) plummeted 28% between Jan. 8 and Wednesday. This coincides with the drop in crude pricing, which has accelerated on coronavirus fears. Over the same period, the price of Brent crude declined 26%.

In other words, the oil price decline has been a huge benefit to container lines on the cost side, by largely removing the IMO 2020 fuel price increase.

If OPEC+ production cuts push the price back up, it would be a negative for container lines. The good news for container lines is that it does not yet appear OPEC+ can increase crude prices. The bad news for container lines is that the cartel’s inability to do so is related to weaker global demand, which will hit the carriers on the revenue side of the equation.

Scrubber-equipped vessels

Ship owners who invested heavily in scrubbers may be rooting for OPEC+ because the sharp decline in the price of VLSFO is having an increasingly negative effect on scrubber economics.

Scrubber economics depends upon the spread between HFO and VLSFO on any given day. The spread implies the “payback period” in which the cost of installing the scrubber is eventually covered. Based on global average prices compiled by Ship & Bunker, that spread was $279 on Jan. 8 and down to half that — $139 — on Wednesday.

This issue was addressed on the Feb. 26 quarterly conference call of Genco Shipping & Trading (NYSE: GNK). The company’s CEO, John Wobensmith, noted that “the spread has certainly weakened, but this is a seasonally slow period and there’s also a slowdown from coronavirus. Once all that’s in our rearview mirror, I expect more demand for VLSFO and for the spreads to push back toward $200. And if the price of oil moves up, the spread will move up as well.”

The question ahead for those who invested millions in fleet scrubber installations is: What if the OPEC+ coalition can’t arrest the slide in crude? What if the price of VLSFO keeps falling and the VLSFO-HFO spread becomes negligible? More FreightWaves/American Shipper articles by Greg Miller

Source: https://www.freightwaves.com/

Is the worst still to come for dry bulk shipping?

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Not surprisingly, coronavirus is a major topic on the quarterly calls of public dry bulk shipping companies — executives maintain it’s having a negative effect on rates. And yet, index data provided to FreightWaves by S&P Global Platts shows that the rate decline clearly predates the coronavirus. Base spot rates have actually bounced up off the bottom during the outbreak.

So is the worst still to come, or are coronavirus dry bulk fears overblown? Have rates reached a point where they cannot go lower because owners will not accept lower rates?

During the quarterly call of Genco Shipping & Trading (NYSE: GNK) on Wednesday, CEO John Wobensmith said, “In addition to seasonal weakness, the outbreak of the novel coronavirus has further impacted industrial activity, commodity demand and freight rates.

“It’s still a little early to tell when Capesizes [bulkers with capacity of around 180,000 deadweight tons that carry iron ore and coal] start to move up in a significant way,” he continued.

“Our belief is that when the coronavirus is contained and things are stabilized, the Chinese government will do a large stimulus package, and Capes will certainly benefit.”

Platts global Capesize index

If there is a negative effect from coronavirus on rates, it isn’t showing up yet in the index data — a potentially ominous sign, given that data from CargoMetrics implies a sharp decline in China’s bulk import appetite.

In addition to the 5TC Index produced by the Baltic Exchange, Capesize rates are tracked by S&P Global Platts through its CapeT4 Index. Platts provides dual indices in light of the IMO 2020 regulation, which requires all ships without exhaust-gas scrubbers to burn more expensive 0.5% sulfur fuel called very low sulfur fuel oil (VLSFO).

The dual indices assess the rates of nonscrubber ships burning VLSFO and scrubber ships burning 3.5% sulfur heavy fuel oil (HFO). Because HFO is cheaper, scrubber ships earn more on a net basis, depending on the VLSFO-HFO spread.

The Platts CapeT4 assessed Capesize rates on Wednesday at $4,292 per day for nonscrubber ships burning VLSFO. The index has been hovering around this level since the beginning of the year, well before China implemented virus containment measures; rates fell in December, not January. The index is down 13% from Jan. 2, but it’s up 72% from a nadir of $2,497 per day on Feb. 13. In other words, it has risen (albeit off extremely low levels) during the very time virus fears have heightened.

For scrubber ships, rates have declined 44% year to date. But that’s not because of coronavirus. It’s because the daily savings from burning HFO have decreased 57% over this period. The rate calculated on a time-charter-equivalent (TCE) basis is not lower because the base rate (in dollars per ton of cargo) is lower, but because the owners of scrubber ships are not saving as much on fuel as they did at the beginning of the year.

Platts Australia-China index

The Platts CapeT4 index is heavily driven by the Australia-China trade (which accounts for 46% of the index weighting) and the Brazil-China trade (45% weighting).

Excess ship capacity has pressured Australia-China rates as so many Capesizes reposition to the Pacific Basin for scrubber retrofits. The Platts Australia-China index has suffered the most extreme lows — it actually went negative for nonscrubber ships in early January.

As of Wednesday, rates were assessed at $4,176 per day for nonscrubber Capes burning VLSFO. This is relatively close to where the index started the year; down 6% from Jan. 2. According to Platts, the nonscrubber index for Australia-China has more than doubled since Jan. 22, i.e., during the outbreak containment period in China.

Rates for scrubber ships burning HFO have fallen 38% since the start of the year, once again, not due to coronavirus, but rather, due to a 54% drop in the daily savings from the fuel spread.

Platts Brazil-China index

The Brazil-China export route has been heavily impaired by severe flooding and ongoing production issues of miner Vale (NYSE: VALE) due to constraints following the tragic tailings-dam accident a year ago.

Brazil-China Cape rates were outperforming Australia-China rates earlier in the quarter, but they’re now roughly in line. As of Wednesday, nonscrubber Capes sailing from Brazil to China were earning $4,392 per day, according to Platts.

Nonscrubber earnings have been relatively flat year to date, down 7% from Jan. 2, but they are now double the quarter low of $1,971 per day on Feb. 12.

TCE rates assessed for scrubber Capes are down 45% year to date, driven by a 58% decline in savings from burning HFO as opposed to more expensive VLSFO.

Genco quarterly results

Genco is a perfect example of a company benefiting from the HFO-VLSFO spread. It now has scrubbers installed on all 17 of its Capesizes.

The New York-headquartered company reported net income of $882,000 for the fourth quarter of 2019 versus net income of $18.3 million in the fourth quarter of 2018. Adjusted earnings per share for the most recent period of 7 cents came in below the consensus forecast for 9 cents.

For the first quarter of 2020, Genco has 78% of its available days for its Capesizes booked at $17,080 per day, well above index levels.

dry bulk ship
Genco-owned Capesize. Photo credit: Genco

Wobensmith attributed the outperformance to three factors. “First, we clearly weren’t predicting coronavirus but we were predicting a seasonally slow first quarter, so we did forward bookings. Second, we bought quite a bit of fuel [HFO] at the end of December, when prices were lower. And third, the spread was beneficial [the spread between HFO and VLSFO earlier in the first quarter].”

He conceded that the spread has now come down. “The spread today is $155-$160 [per ton], so that has certainly weakened. But again, this is a seasonally slow period and there’s also a slowdown from the coronavirus. Once all that’s in our rearview mirror, I expect more demand for VLSFO and for the spreads to push back towards $200. And if the price of oil moves up, the spread will move up as well,” Wobensmith said. More FreightWaves/American Shipper articles by Greg Miller

Source: https://www.freightwaves.com/

Διάλεξη για τη βελτιστοποίηση απόδοσης ταξιδιού εμπορικών πλοίων

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Παρακολούθησα σήμερα την πολύ ενδιαφέρουσα διάλεξη για τη βελτιστοποίηση απόδοσης ταξιδιού εμπορικών πλοίων. (VPN Vessel Performance Optimazation). Το smart ship είναι ήδη εδώ όπως ειπώθηκε από έναν από τους ομιλητές . Το εντυπωσιακό που επίσης ειπώθηκε είναι ότι η Wartsila σχεδιάζει 3d εκτυπωτή για την “εκτύπωση” ανταλλακτικών μέσα στο πλοίο! Η συνεχής λήψη ψηφιακών δεδομένων, από την κατανάλωση καυσίμων, μέχρι και τα καιρικά φαινόμενα όπως άνεμος και κυματισμός δίνουν συνεχώς πληροφορίες στους operators για τη βέλτιστη διαδρομή, ταχύτητα και κατανάλωση με σκοπό την οικονομικότερη και άριστη διαχείριση του πλοίου. #roussosbros #shipping #shippingagency #vpo #vpglobal