LR1s switch to Panamax market on higher dirty tanker rates, Americas supply tightens

Clean tanker owners have moved multiple Long Range 1 ships over to the Panamax market in recent weeks in response to the highest rates since February in the dirty tanker market, taking advantage of high returns, and prompting a tightening of LR1 availability on the US Gulf Coast.

Last week the BW Tagus, a ship typically working in the clean LR1 spot market, was placed on subjects by Shell for a USGC-Singapore run at lump sum $3.3 million, lifting a cargo of dirty condensate October 29 and sailing around the Cape of Good Hope.
Later, market participants heard the Altesse was on subjects for a dirty product, although no further details could be uncovered.

On a dollar per metric ton basis, a USGC-Singapore run for a Panamax at lump sum $3.3 million would equate to $66/mt. By comparison, the BW Tagus, an LR1, was placed on subjects for a USGC-South Korea run at lump sum $2.25 million, earning $37.50/mt for the longer voyage.

LR1 TIGHTNESS SUPPORTS FREIGHT INCREASE
The departure of multiple LR1s to the Panamax market has tightened availability of LR1s in the Americas, although supply on the USGC was already low as October began after the Continent market drew the most tonnage in the first decade of the month.

Americas LR1 freight spiked last week as inquiries started to increase for the late October fixing window due to the tightness in the region, with the few owners in the area extremely bullish.

“Right now, with ships going back into [the dirty market] there are going to be situations where it’s extremely tight and owners can ask what they want,” an LR1 shipowner said.

The 60,000 mt USGC-Brazil route was assessed at Worldscale 140 Friday, a jump of of 40% from October 10’s w100 assessment, and at w145 Monday, with market participants hearing offers in the w150-w160 range for that run.

CLEANING PROCESS
While higher rates in the dirty tanker market are providing a strong incentive for owners to switch their LR1s to Panamaxes, the process to clean a tanker in order to return to the refined product market can take multiple months, requiring specific cargo loads and coating requirements.

“It’s a pain going from dirty to clean and normally you have to do three clean cargoes before you can get full market levels. You can take dirty naphtha or something else, condensate or gasoil,” a shipbroker said.

Depending on the condition of the tank coating and the cargoes carried during the cleaning process, switching a Panamax to an LR1 is reported to cost $300,000-$500,000.

LR1s moving into the Panamax market in October will likely stay in the dirty tanker spot market through the new year, missing the potential clean tanker freight boom shipowners have anticipated upon the mid-October return of USGC refining capacity and the increase in clean product exports from the USGC and other regions ahead of the debut of the IMO 2020 sulfur regulations.

On the whole, smaller Medium Range tankers have not taken to switching to the dirty trade thus far, according to sources.

“I have heard of one MR doing it, but for an owner who is more [dirty tanker] focused,” a second shipowner said Monday.
Source: Platts