TANKERS: Aframaxes turning clean as dirty rates hit multi-year lows

Singapore — Aframax owners reeling under multi-year low rates and negative earnings on certain routes are cleaning some of their ships to load refined oil products, market participants said this week.

Saudi Arabia's voluntary oil output cuts of 1 million b/d in February and March and a sharp fall in Australia's crude imports have reduced trade volumes and resulted in a tonnage overhang, which is dragging down rates.

Aframaxes are losing around $1,000/day on the key Indonesia-North Asia routes, according to brokers' estimates.

Since recovery in freight rates is unlikely in the near term, Aframax owners are exploring the option of cleaning up part of their fleet. At least half a dozen Aframaxes, including the Prosky, Prostar, Amfitriti, Fair Seas and Torm Marina, have switched to the clean segment, shipping sources said.

Double-coated tankers pick up condensates

Some of the double-coated tankers are picking up condensate cargoes so that they do not have to undertake any major cleaning operations, the sources added. This helps keep the option open for moving dirty cargoes as well.

However, not all double-coated tankers with recent history of moving dirty cargoes will be eligible for moving clean condensate, said a source with a tankers' owner.

He said if the condensate is being used in steam crackers, the decision on tanker type will also be determined by the cargo's mercury content, as not all crackers can directly use condensate with high mercury levels. But there are condensate cracking plants in Asia which have separate cleaning units to breakdown mercury, and they can receive condensate in a tanker with recent dirty cargo history, he explained.

According to a chartering executive, one of the double-coated tankers, Ocean Avra, was cleaned up but unable to get a clean cargo so returned back to the dirty tankers market.

Another chartering executive pointed out that there is already a supply deluge in the clean tankers market, making the entry of converted dirty tankers difficult. There are close to two dozen LR2s available for loading over the next one week, while the number rises to around 85 over the next four weeks, according to brokers' estimates.

Nevertheless, those exploring the option to switch to clean are not deterred as they are taking a medium-term commercial view, shipping sources said.

One such shipping source points towards the West-to-East movement of cargoes, which fetch bigger ton mile demand for owners. In the case of dirty tankers, such voyages are dominated by VLCCs and Suezmaxes carrying crude from the Americas to East Asia.

The chances of Aframaxes having a share in this pie is slim due to economies of scale, the source said. An Aframax can typically carry about 600,000 barrels of oil while the volume is 1 million barrels and 2 million barrels each for Suezmaxes and VLCCs.

However, if these tankers switch to the clean segment, they can eye the traffic of West-to-East arbitrage cargoes of refined products such as naphtha. It is commonplace for naphtha cargoes being moved from the US, Black Sea region and the Mediterranean on the LR2s, he said.

"While it is true that the current earnings on the spot market is poor on the LR2s, one has to take a long-term view while switching a tanker to clean from dirty," he added.

S&P Global Platts has assessed the key Persian Gulf-East Aframax route at around 60 Worldscale points on most trading days so far this year. This translates to $10.28/mt, basis Platts basket of load and discharge ports, which is the lowest level in almost four and a half years.

Weaker demand, poorer returns

The ongoing coronavirus pandemic, low refinery runs as well as weaker middle distillate product cracks dampened the Asian buyer's appetite for regional crude.

The number of Aframax fixtures for Persian Gulf loading declined 50% year on year in January, according to the estimates of brokers.

The dwindling demand for Aframaxes was further confirmed with the export volume of Malaysian and Indonesian crude and refinery feedstocks to Australia tumbling 36% year on year in 2020, according to data from Australia's Department of Industry, Science, Energy and Resources. That translates to 30 Aframax shipments or less on a yearly basis.

North Asia is also poised to enter the spring refinery maintenance season, which typically begins in March and peaks in the second quarter. Asian refining margins are still in the doldrums, while recovery in oil product demand is "tentative" because COVID-19 cases are rising again in some of the region's key markets, including China, Japan, Indonesia, and Malaysia, according to Platts Analytics.

Tonnage surplus exacerbated by lower demolition numbers

Tonnage overhang due to less scrapping activities was another factor dragging down Aframax rates.

"While there has been an increase in scrapping activity over the past several months, given the dismal outlook for tanker demand and rates, overall demolition activity for 2020 is still the lowest since 2016. Floating storage and fewer new orders have given many older tankers a new lease on life. Just 28 dirty tankers were scrapped during 2020," the Platts Analytics report said.