IMO 2020 throws monkey wrench into ocean rate visibility
Getting a handle on spot pricing for tankers and bulkers has always been tricky. In 2020, it has become dramatically more complicated, courtesy of new fuel regulations and intensifying rate and fuel-price volatility.
Thursday’s analyst call by crude-tanker owner DHT Holdings (NYSE: DHT) as well as the Jan. 27 call by Scorpio Bulkers (NYSE: SALT) highlighted the new hurdles to rate visibility.
“This is going to be the difficulty of your job as analysts,” Scorpio Bulkers President Robert Bugbee told call participants. DHT co-CEO Svein Moxnes Harfjeld characterized this year’s pricing situation as “confusing for stakeholders.”
The standard bulk shipping measure to compare pricing is the time-charter equivalent (TCE) rate, which converts a spot transportation contract priced in dollars per ton of cargo (in the tanker market, under a system called Worldscale) into a dollar-per-day measure, with voyage costs including fuel costs subtracted from the total.
There were previously two distinct categories for TCE rates: for “eco ships” and non-eco ships. An eco ship is a vessel built in the past decade that’s specifically designed for enhanced fuel efficiency. For the same spot cargo deal priced in dollars per ton, an eco ship would post a higher TCE than a non-eco ship because its fuel consumption is lower.
Starting Jan. 1, when the IMO 2020 rule came into effect, the number of distinct TCE categories expanded to four. Ships with exhaust-gas scrubbers can continue to use cheaper 3.5% sulfur heavy fuel oil (HFO). Those without scrubbers switched to more expensive 0.5% sulfur fuel known as very low sulfur fuel oil (VLSFO).
The four categories are scrubber eco, scrubber non-eco, non-scrubber eco and non-scrubber non-eco. “You have four different types of vessels … and all four will have different returns at exactly the same point in the market,” Bugbee said.
Further complicating the picture: TCE variations among all four categories hinge on the difference between HFO and VLSFO pricing, which changes daily — and this spread is completely different based on which port the fuel is sourced at.
Yet another variable obscuring TCE visibility: The reported HFO and VLSFO prices are on a spot basis, but most larger companies — including the public companies — have arranged fuel purchases on a contract basis, and those prices are confidential.
According to DHT co-CEO Trygve Munthe, “There are greatly different returns [in the tanker market] based on the same Worldscale rate depending on what type of ship you have.” DHT provided a matrix of how current rates for very large crude carriers (VLCCs, tankers with a capacity of 2 million barrels of crude oil) diverge.
Chart: DHT Holdings
“While non-eco non-scrubber ships make about $16,500 per day in the current market, scrubber-fitted eco ships make more than twice that, about $35,400 per day. The scrubber premium based on current bunker [marine fuel] prices is about $13,700 per day for non-eco ships and $9,400 per day for eco ships. It is lower for eco ships because of lower consumption, of course.
“The eco premium is about $9,500 a day for non-scrubber ships, but drops to $5,200 per day for scrubber-fitted ships. The value of the fuel efficiency is lower for scrubber-fitted ships because HFO is cheaper than compliant fuel,” Munthe explained.
Harfjeld concluded, “TCE is the key term when analyzing revenue in shipping companies, but it increasingly consists of varying inputs and assumptions, presenting challenges in comparing numbers reported by companies and linking such numbers to broker estimates and freight indices.”
DHT reported net income of $75.9 million for the fourth quarter of 2019 versus $12 million in the fourth quarter of 2018. The latest period was described as the best quarter in the company’s history. Adjusted earnings per share came in at 45 cents, below the analyst consensus for 55 cents.
The company’s VLCCs earned an average TCE of $58,500 per day in the fourth quarter. DHT has 58% of available VLCC spot days for the first quarter of 2020 booked at $81,600 per day.
On the call, Munthe said that fourth-quarter rates would have been higher but a new accounting rule limited the ability to recognize revenue in that period. He also said port congestion issues have tempered first-quarter rates.
“When it comes to our first-quarter spot bookings, we have frankly been a bit unfortunate with our scheduling,” he admitted. “We had a number of ships tied up in congestion in Chinese ports. The ships missed the opportunity to get fixed [chartered] when the market was at its strongest. By the time the ships finally came free of Chinese delays, the spot market had already started receding. Frustrating, indeed, but this is how the cookie crumbled for us this time around.”
Source: Freight Waves by Greg Miller (https://www.freightwaves.com/news/imo-2020-throws-monkey-wrench-into-ocean-rate-visibility)