SIMON SAYS: What makes ship owners smile?

Submitted by Simon Hill on Tue, 09/24/2019 - 17:00
What makes ship owners smile?

There’s nothing that makes a ship owner smile more than seeing a decent number of ships getting fixed in the market, of course the grin widens if the rates are also edging up, and if the levels are jumping up, well I’ll leave that one for you to decide. As all eyes last week were focused on the consequences of the drone attack at Saudi Arabia’s key crude oil processing facility in Abqaiq, charterers hesitated for a while, but not for that long. Ships got fixed all over the place and the trader re-let, the apparent albatross around the necks of most ship-owners, has at least been buried for a while. So, in the excitement of all that was going on in “drone” week, what should we decipher as far as future freight levels are concerned. Forget the albatross, it all looks more and more the bull to me!

The initial reaction to the news of potential cutbacks in the Middle East, was to surely think that there will be less cargoes to load, with freight levels likely to come under pressure, but of course there’s more to it than that, there always is! By the end of the week we had seen freight numbers reach higher levels than at the previous Friday’s close, with both the Baltic (up from $58.8/ Mt to $65.4/ Mt) and Houston to Chiba spot rates (up from $103/ Mt to over $110/ Mt).

Despite the likelihood of less exports from the Kingdom, there were a number of reasons why a move up was happening. The market felt that any cargo loss in the Middle East would be made up by extra movements of LPG out of the U.S., which would ultimately result in more ton miles being performed. The jump in crude values had a similar impact on the price of bunkers, and in a relatively tight LPG shipping market, this gets pushed into the freight calculators, and the higher freight number that comes out the other end can be passed on to the charterer. In addition, the drone attack increased the security risk associated with ships moving through and loading in the Arabian Gulf, and before you know it, war risk premiums have gone up, forcing ship owners to also include these costs in their spot freight numbers. The market volatility also sparked the charterers to stop sitting on their haunches. Instead, they started fixing ships by the end of the week, for loading not just out of the U.S., but also from Europe and Africa, all heading to Asia.

What also makes a ship owner happy is when traders, with their own ships, become more interested in loading cargo, rather than trying to re-let those ships to others. Re-letting by traders was always considered by the more hawkish of ship owners, as the traders attempting to under-cut freight levels that had been strengthened by the sweat, toil and tears of the ship owner. As I have highlighted before, the main ship owners tend to get evaluated quarter by quarter on the results they put out to the stock market, normally measured against that quarter’s Baltic levels, translated into a daily equivalent time charter rate. What this tends to do, is push the ship owner away from chartering his ships out on long-term time charters, that might end-up above the current market or below it, but rarely at the market.

It’s hard to beat the market and ship owners prefer to hold more of their ships in the spot market, achieving market rates. It also means they worry less that trader re-lets are going to undercut them, sometimes with a ship they might own anyway! The negative being that some charterers, such as Vitol, Petredec and Trafigura have instead, taken it into their own hands, and gone to the ship building yards, and ordered their own VLGCs. However, if the freight market is strong, as it is now, the ship owners are back holding the reigns, and this can only be good for keeping freight levels higher. The word “good” of course depends on which side of the fence you sit and isn’t just me talking my “commentator’s” book!

Following on from the above logic, it’s easy to just jump on the higher freight bandwagon, but one of the core elements of yesterday’s SIMON SAYS was that the expectation of more cargoes from the U.S. appearing, was not being met by the reality. Initially there was concern with the EIA’s propane export numbers, especially since early August, which have been coming out around 300 M Bbls/d under our expectations of nearer to 1.2 million Bbls/d, but freight levels have not collapsed, easing yes, but still remaining above $100/ Mt throughout. The main reason being that more butane tanks have been nominated against previously all propane slots, mainly as a result of demand in Europe, the Mediterranean, Indonesia and even India, for the split propane and butane cargoes. Therefore, propane exports have dropped, and we don’t see the butane exports, as those numbers aren’t published until the monthly EIA figures come out a couple of months later. Therefore, shipping has not been impacted as much as the EIA propane exports may have suggested they should have been! But, the ship owners were expecting better, with more cargoes starting to appear as capacity increased, especially out of Enterprise in Houston, and this just doesn’t look like it’s happening at all soon, unless spot terminal fees are heading into the low double digits, somehow forcing cargoes out of the woodwork.

In addition, we have seen more mid-sized ships taking up slots to load smaller butane cargoes for discharge in North West Europe, The Med and also into Africa. This does happen regularly anyway, but it appears to have increased. With the VLGC rates having raced up to near $1.4 million per month, they have been higher in the last few months as well, it makes a mid-size costing half that time charter monthly rate relatively more attractive, especially saving expensive two port options or waiting time in such places as Tarragona. Slow discharges at high demurrage rates can kill deal economics.

It looks as if the ship owners smile will continue for the foreseeable future. Even though we are seeing rates back up at $110/ Mt for the Houston to Chiba via Panama route, ship owners are of course pushing for more. I would have thought the Middle East issues, coupled with the enticing premiums west, would bring more ships over the Pacific to the U.S. Gulf, instead of heading back towards the Straits of Hormuz. But as I have said before, it’s more a question of how high freight rates will go, not how far they are likely to fall. Maybe a few more ship owners are flicking through the Panda 91T brochure today, I certainly would!