You pay more to get more, and renting a four-bedroom villa is more expensive than renting a studio apartment.
In ocean-going shipping, therefore, it must be much more expensive to book a load of coal on a huge dry bulk carrier than on a bulk carrier carrying less than a third of its capacity. In other words, a supertanker would be much more expensive than the spot freight of a small boat.
But this year, things are different. Spot rates for small bulk carriers are higher than for large ships and, in most cases, much higher.
Crude oil market: VLCC no longer looks good
VLCCs serve long-haul, high-volume crude oil trade, such as routes from the Middle East to Asia and from the US to Asia. Small tankers do not have the same economies of scale and generally serve shorter routes, but they are more versatile than VLCC’s in terms of terminal suitability.
“VLCCS have underperformed relative to smaller crude carriers since early 2021 and continue to do so now, as if the tanker market is conspiring against VLCCS,” Erik Broekhuizen, manager of maritime research at Poten & Partners, wrote in a recent report.
As of Tuesday, spot freight for 10-year VLCC (320,000DWT) was the equivalent of just $1,400 a day, according to Clarkson.
Avra crude oil tankers (115,000DWT), which have 60 percent less dead weight tons than VLCCS, have spot prices 15 times higher at $21,300 per day.
VLCCS have traditionally been the bellwether of the tanker market, with the largest crude carriers often leading the market, but this has changed during the pandemic. VLCC prices are being hit from two sides, supply and demand:
On the supply side, broker BRS says 48 new VLCC ships will be delivered this year, 25 of which have already been launched. By May, only one VLCC had been scrapped and three had been sold for scrap.
On the demand side, Opec continues to restrict seaborne exports, and the pandemic blockade has hit Chinese fuel demand. “China, the largest player in global VLCC traffic, has cut purchases from West Africa, Latin America and the United States,” Broekhuizen said.
At the same time, the Russo-Ukrainian war also brought pressure to VLCC. According to BRS, Avra tankers account for 85 per cent of Russia’s crude exports and India has also switched to Russian imports, replacing the VLCCS it used to import from the US with Avra tankers and mid-sized Suez tankers (which carry half the VLCCS).
According to Broekhuizen, Europe is also replacing some Of Russia’s crude imports with SUez-type tankers carrying U.S. crude, indirectly leading to a decrease in VLCC shipments from the U.S. to Asia.
Oil tanker market: Revenue in the last nine weeks is as much as in the whole of last year
As consumption of gasoline, diesel and jet fuels gradually recovers, refined products will need to be transported at a higher rate than crude, which is another advantage for smaller tankers.
In the product sector, the spot price of a 10-year-old LR2 (115,000DWT) tanker averages $26,200 / day, which is 10% lower than the price of a MR (50,000DWT) tanker, which carries less than half the cargo of the LR2.
Strong demand from western South America for US refined oil exports has driven the high volumes of MR tankers, partly bringing a premium between smaller and larger refined oil tankers.
Nolan wrote over the weekend: “The MR fuel tanker has generated as much revenue in the last nine weeks as in all of 2021. “If the market for product tankers and Avra crude oil tankers continues at current levels, it could be a record year.”
Dry bulk market: Small bulk carriers have been favored for a long time
Clarkson’s data show a similar divergence in the dry bulk shipping market.
Dry bulk is the world’s largest cargo market, which is characterized by a wide variety of cargo combinations for ships of different sizes.
Capesize ships are highly dependent on iron ore cargoes, mostly from Australia and Brazil to China, followed by coal and bauxite.
More kinds of goods are carried than small bulk carriers: grains, coal, cement, steel, salt, ore, logs, fertilizers, phosphates, aggregates, alumina, copper, salt, and to more diverse destinations.
Capesize rates depend on Chinese demand, while smaller bulk carriers, which are more closely linked to global GDP, also benefit from cargo that used to be shipped in containers but switched to bulk cargo to save on freight costs.
China imports iron ore and coal through capesize ships, which are then used to make steel, but steel production fell 8.7 percent in The January-May period compared with the same period last year because of pressure in China’s housing market.
Under the lockdown, dry bulk shipments to China fell 9.2 percent in the first half of 2022 compared with the same period last year, according to BRS. Capesize ships have underperformed as China’s demand for iron ore and coal slows, while Brazil and Australia have suffered weather-related and epidemic-related supply disruptions, respectively. Spot freight rates for capesize (180,000DWT) bulk carriers averaged $18,100 / d over the past year.
Super-agile bulk carriers (56,000DWT) carry less than a third of the capacity of capesize ships, but average prices are 49% higher, at $26,900 a day.
“The dry bulk market is the opposite of normal trading patterns,” Stifel analyst Ben Nolan noted in his latest quarterly earnings preview.
Large bulk carriers traditionally earn more than smaller ships because they carry much more per voyage, but this year it has been reversed. Ships of different sizes carry different commodities on different routes.
For now, small tankers and bulk carriers seem to be in favour. Such reversals of fortune happen from time to time, but rarely for so long or with so much impact.
MSI notes: “Small bulk carriers have seen very strong freight rates compared to large bulk carriers this year, and even a shipment of logs normally carried by small (below 35,000DWT) or super-flexible bulk carriers was switched to a 205,000 DWT bulk carrier from Uruguay to China in April.”
Tanker market forecast: VLCC market will rise and prosper “like phoenix”
If history is any indication, big tankers will command a premium again.
Frode Mørkedal, an analyst at Clarkson, predicts the VLCC market will rise and flourish “like a phoenix”.
As for 10-year-old VLCCS, which averaged $1,400 a day this year, Clarkson predicts they will rebound to $41,000 a day next year, or 78% more than Avla, and $55,000 a day, or 90% more than Avla, by 2024.
According to Broekhuizen: “In the long run, VLCC economies of scale will bring this market back. “Oil producers in the Middle East and the fastest growing consumers in Asia have the infrastructure to use VLCC, using the largest ships available to minimize costs.”
On the supply side, orders for new VLCCS are historically low, ensuring ultra-low fleet growth, which is a great benefit for future rates. Deliveries for 2023-2024 are already set, with only 15 new VLCCS for next year and three for 2024, according to BRS. No new VLCC orders for 2025 or beyond.
In the refined oil wheel market, in April, MR returns were at a much higher premium to LR2 returns, but now the gap between LR2 and MR has narrowed. Higher demand for long-haul refined oil shipments has driven LR2 rates, and Clarkson predicts that in 2023-2024, large product ships will again outperform smaller ones.
Dry bulk cargo market forecast: the freight price of small dry bulk carrier will fall, and the gap with large bulk carrier will narrow
The gap between large and small dry bulk carriers has also narrowed, though more of the smaller ships’ rates have fallen back to the larger ships’ rates than the larger ships’ rates have risen.
Nolan predicted, “Iron ore shipments from Brazil and Australia should increase, which is good news for capesize vessels, but at the same time, there will be an easing in container traffic by bulk carriers, which is bad for smaller vessels.”
Clarkson expects revenues from large bulk carriers to outpace those from small bulk carriers again in 2023-2024, but unlike VLCC’s outlook does not foresee a sharp rise in rates.
Mørkedal said: “We expect average spot freight rates for Capescapes to be $23,000 / d in 2022, then fall to $22,000 / d in 2023 and rise slightly to $24,000 / d in 2024.
The shipping price is reasonable as most companies’ financial breakeven is between $13,000- $14,000 / day, but overall there are not many surprises in the market.