US clean tanker owners weigh options amid increased appetite for trans-Pacific naphtha flows

Clean tankers positioned in the Americas are showing resistance to trans-Pacific voyages despite demand for naphtha exports from US Gulf Coast into Northeast Asia, citing high bunker prices, weak daily earnings and bearish freight market at discharge as deterrents to reposition.

Concurrently, there is a strong appetite by Asia's naphtha crackers due to capacity additions over 2021, increased average monthly Americas to Asia arbitrage flow compared to 2020.

Medium Range tankers, which typically carry 38,000 mt parcels of naphtha for arbitrage into Asia, have shown resistance in submitting offers for cargoes with trans-Pacific options due to low earnings on the route and low rates for MRs in the spot Asian market.

"The problem with the Far East is there is very little activity, and they expect rates to have further downward pressure with no relief in the near future," a US-based shipbroker said.

The same shipbroker estimated daily earnings for an MR USGC to North Asia voyage at around $5,500 per day from load to discharge at a lump sum freight around $1.4 million, including Panama Canal transit -- a thin margin considering operating cost around $3,000/day.

Current Panama Canal delays for Southbound voyages stand between five to six days for tankers without pre-booked transit slots, said shipowners. Typically, a USGC to North Asia voyage via Panama Canal takes 30 days steaming at 13 knots, without delays.

For spot MRs, shipowners prefer the higher earnings on regional voyages from USGC to Latin America, due to more demurrage days, sources said. With daily earnings low for MRs across the Americas, Asia and Europe, owners are refraining from repositioning between regions without laden legs in between.

Charterers turned to USGC Long Range 1 tankers for moving arbitrage naphtha due to economies of scale. LR1s, which typically carry 60,000 mt parcels for naphtha, would earn over $9,000/day for a USGC-North Asia voyage at a rate of lump sum $1.6 million, an LR1 owner said, based on a 44-day round trip. However, operating costs are higher at around $8,000/day.

LR1s have more profitable cargo opportunities in Asia compared to MRs, so were more open to sail there. Meanwhile, lower LR1 rates in Europe deterred owners from ballasting over, rather sailing to Asia amid increased naphtha demand, which weighed on freight in USGC.

Trans-Pacific naphtha flows jump in May, June

Presently, limited gasoline blending demand in US and Europe coupled with growing demand for cracker-feed naphtha in Asia, increased arbitrage flows this year. Around 2.176 million mt of naphtha loading from the Americas headed to Asia were seen in Q2 2021, up from 1.766 million mt in Q1 2021 and 680,000 mt in Q4 2020, according to data from sources and S&P Global Platts cFlow.

Despite a dip in USGC petroleum product exports in the wake of the Colonial Pipeline shutdown May 7, US to Asia naphtha exports loading in May surged to an all-time high of over 900,000 mt, showed Platts data. In previous years, US to Asia flows averaged 200,000 mt/month or less, sources said.

Arbitrage volumes are expected to stay healthy as 670,000 mt of June-loading naphtha cargoes from the American continent were pointed towards Asia, sources said.

"Naphtha export from the Americas has grown to make up 9% of total Northeast Asia's imports in 2020, more than doubled from 4% in 2017, and will increase further going forward given Asia's growing appetite for high paraffinic naphtha to feed its steam crackers," said Aaron Cheong, Senior Feedstock Analyst at Platts Analytics.

Major Far East steam cracking naphtha demand ('000 barrels per day)

Data from: Asia Naphtha Monthly Report, published June 8 by S&P Global Platts Analytics

Product demand resurgence could limit arbitrages

Freight levels in the Americas were suppressed in H1 2021 by low product demand in Latin America, particularly due to pandemic lockdowns in Brazil and Mexico, two of the largest import markets for USGC products. However, Mexico's demand improved in Q2, and shipowners hope easing lockdowns in South America could see increased USGC refinery utilization and in tandem firmer freight.

USGC ULSD production reached a 10-month high in the week ended June 11, increasing 106,000 b/d to 2.77 million b/d; and USGC refinery utilization was 93% -- a level last higher at 94.1% during the week ended January 17, 2020, showed US Energy Information Administration data June 16.

A return of USGC distillate and gasoline exports to Latin America could provide long-awaited relief for shipowners, however vital arbitrages have a delicate outlook in the face of an increasing freight market.