Asian VLCC crude cargoes split into Suezmaxes to save demurrage costs: sources

Singapore — Charterers across Asia are splitting their VLCC crude cargoes and are taking the one-million barrel capacity Suezmaxes instead, to save on freight costs at a time when rates have made giant leaps to fresh record highs for the year.

"More than half a dozen cargoes have already been split in the last few days," a source with a dirty tanker owner said.

Suezmaxes are capitalizing on a standoff between VLCC charterers and owners, a second source with another owner said.

Among the companies which have reportedly split their cargoes or have tried doing so, include HOB, Formosa and Hengli. A Formosa executive declined to comment when asked on the matter, while the rest could not be immediately reached for comment.

More companies are exploring such a possibility in the run up to cargo stem nominations for May loadings in the Middle East, another source said.

While the actual freight cost for charterers on the Middle East-North Asia routes is not much different between the two vessel sizes, the demurrage costs for VLCCs are more than double that of Suezmaxes, according to shipping industry estimates and S&P Global Platts data.

Early this week, when there was a spurt in the split of such cargo stems, Suezmaxes were cheaper by hardly $1/mt compared with VLCCs. This gap has since been eroded as VLCC rates declined once the splitting of cargoes gathered pace.

HUGE DEMURRAGE COST

"It is the demurrage which is the killer," a source with one of the owners said.

At current VLCC freight rates, owners are seeking close to $180,000/day as demurrage on the Persian Gulf-East Asia routes, which is in line with their daily earnings. For Suezmaxes, fixtures done earlier this week had agreed on demurrage of around $80,000 per day, but it is now closer to $65,000/day, according to brokers' estimates.

Demurrage is typically around 1%-1.25% of the daily earnings of VLCCs, because it is the amount the owner may lose if the ship gets delayed beyond the prescribed laytime.

Owners' earnings on VLCCs, and therefore demurrage, have gone up at a time when the probability of incurring it is more for the charterers.

CHEAPER CRUDE, LONGER WAITING

The global economic recession, hastened by the coronavirus pandemic, has dragged crude consumption and prices lower, leaving shore tanks full and prompting trading companies as well as charterers to store crude on the VLCC itself.

"Waiting time is now much longer than usual," a broker in Beijing said.

The insertion of the COVID-19 clause means that any delays due to reasons of quarantine are also on the charterers' account, added a broker in Mumbai.

This implies that incurring a demurrage for even five days will make a VLCC charterer poorer by close to $1 million, one of the market participants said.

Many of the VLCC cargoes have two load ports and discharge ports each and this adds to the demurrage costs, he said.

It is against this backdrop that charterers are trying to take Suezmaxes, but the same sources also point out that it is not always easy to do so due to logistical issues.

For one, getting a stem split means arranging berth for both ships within the same laycan and the supplier is not always amenable.

"In such cases, the charterer is dealing with one supplier, but [the latter] is handling many such buyers within a tied loading schedule," a broker in Singapore said.

Despite such challenges, market sources said that unless there is a big jump in Suezmax rates, such splits will become commonplace as long as the prevailing lower crude prices persist, where consumption is lower, but refiners are still buying to take advantage of the attractive prices. Therefore, they run a big risk of incurring huge demurrage costs.

At several ports, there is already a long queue of crude laden carriers, which will take several days to be discharged, the broker in Mumbai added.

Recent Suezmax cargoes, not necessarily split from a bigger parcel, include those for delivery into India's strategic petroleum reserves near Mangalore, market sources said.