Dwindling Australia crude imports upset Aframax freight dynamics

Singapore — Aframax tanker market in the East of Suez was bearing the brunt of Australia's dwindling crude imports and its diminishing refinery capacity, lowering the cargo volumes for this segment of ships.

The country's shrinking refining landscape has altered freight dynamics for inbound and outbound Aframax voyages with the premium for front haul Indonesia to Australia trip almost vanishing over backhaul Australia to North Asia passage.

This was due to fewer crude shipments into Australia since 2019, according to S&P Global Platts data.

Between 2015 and 2018, the Indonesia to Australia 80,000 mt route traded at an average premium of 5 Worldscale points over the Australia to North Asia 80,000 mt route. This flipped to an average discount of w2.82 points over the Australia to North Asia 80,000 mt route.

In a front haul voyage, shipowners can garner better returns, while the ship would usually end in a less favorable area. The voyage originating from Australia are typically called back haul, which generally end up as a loss-making trip or offer paltry returns.

Flipping of premium, discount

For a while, shipowners after performing an Indonesia to Australia voyage, would offer a discount on the freight to bring the ship back to Singapore or its proximity, which is a better-paying region for its next employment.

Over the last few years, the trend has changed with the average discount the Australia to North Asia trip enjoyed over South East Asia to Australia route narrowing. It was w1.9 points in 2016, w3.8 points in 2017, w5.76 points in 2018 and w0.18 points in 2019.

However, in 2020, the Australia to North Asia route flipped into a premium at an average of w6 points.

Market sources attributed this shift to the declining Australian import of crude, which has resulted in fewer ships opening around the Australian coast for fresh employment.

"Previously, the Australia to North Asia trip was always viewed as a back haul and discounts were given. This was because of the greater availability of vessels opening around East Coast Australia. After the closure of some refineries, the ships opening there has reduced. So, most of the time we need to get a ballaster from Singapore or Indonesia to do the job," an Aframax broker said.

Australia, which traditionally sources its crude imports from Malaysia and Indonesia, has witnessed shipments tumbling 36% year-on-year in 2020, according to data from Australia's Department of Industry, Science, Energy and Resources. This drop translates into a loss of around 30 Aframax shipments on a yearly basis.

"Sometimes not many ships end up in Australia or bunkers are too high or some physical restrictions at the loading terminals there. It is just not that much going down there," another Aframax broker said.

Receding refinery capacity

The mushrooming of large-scale export-oriented refineries throughout Asia and the Middle East has structurally changed the Australian refining market. The situation has been further exacerbated by the coronavirus pandemic.

A flurry of refinery closures has been announced in recent times. BP is planning to shut its 146,000 b/d Kwinana refinery in Western Australia and convert it into a fuel import terminal.

ExxonMobil has announced plans to shut its 80,000 b/d Altona refinery in Melbourne and use it as a fuel import terminal. With refining margins shrinking, both Viva Energy and Ampol are mulling to convert their refineries at Geelong and Brisbane, respectively, into fuel import terminals.

Demand for Australian condensates rising

However, Australia's condensate and crude exports have seen a gradual increase.

South Korea, Asia's biggest ultra-light crude consumer, imported 14.6 million barrels of crude and condensate from Australia in 2020, almost double the 7.9 million barrels received in 2019, according to the latest data from state-run Korea National Oil Corp.

Specifications, such as high flashpoints, allow Australian heavy crudes to be blended directly into fuel streams without much processing.

The country's high naphtha yield is well suited for petrochemicals production, especially during the pandemic, when demand for medical equipment as well as cleaning chemicals and hygiene products saw a spike.

Ballasters vs vessels

The current developments have helped increase the demand for Aframax tankers loading from Australia. This has seen the need for ballasting a vessel from Singapore, or Indonesia to load from Australia.

"Clearance [at the terminals] in Australia is not easy and that is challenging for old vessels. And when you go to Australia, you must carefully plan as bunkers in Australia is very high," an Aframax owner said, implying that these issues have translated into a premium for performing an Australia to North Asia voyage.