S&P Global - The slump in MR tanker rates have wiped away most of the additional anti-piracy payment and war risk insurance coverage, which charterers have been paying for voyages through the Red Sea region, market participants said July 6.With rates at an all time low, and in what marks a significant departure from the usual Charter Party Agreements, or CPAs, these costs have been included in the freight itself for most of the recent MR tanker fixtures, market participants in the UK, Denmark, UAE, South Korea and Singapore said.
For several years now, the war risk premia and other miscellaneous anti-piracy costs, including the deployment of armed guards for voyages from India and the Persian Gulf to East Africa, have been on charterers' account, in addition to the freight.
Most owners have now discontinued this practice and market participants said in light of current trends, it will take several months, if not more, to resume it.
Most of the owners are currently offering their ships for voyages into East Africa from the Middle East and India, inclusive of the anti-piracy costs, a source with an MR owner said. He cited the example of an owner who had started the trend and how others had followed suit.
Several brokers across Asia, Europe and the Middle East confirmed the trend.
"It was a cash cow for the owners, but now it is all gone," one of the brokers involved in such deals said.
Initially, when additional anti-piracy costs were imposed for voyages across the Red Sea to East Africa, owners were billing several invoices to the charterers, and at times, a few months after a voyage had completed.
Several years ago, to get around the hassle of multiple payments, most MR owners and charterers had agreed on a single lumpsum payment of $150,000 per voyage to include all costs relating to war risk and anti-piracy when ships delivered cargoes into East Africa.
Over the last few years, the actual cost incurred for this purpose has declined, varying between $60,000-$90,000 for MR voyages from the Persian Gulf and West Coast India to East Africa, which had provided owners with an additional and sizable guaranteed income, regardless of the prevailing market trend, the broker said.
However, with cargoes drying up and vessels piling, charterers are insisting on a reduction in the lumpsum anti-piracy and war risk insurance cost, which most owners have simply clubbed with the freight rate itself.
They are accepting the charterers' first proposed rate, called the "counter", just to get the cargo, he said.
This is not surprising because, according to a broker in Singapore, there are close to 100 MRs available for loading in the Persian Gulf over the next fortnight.
Even the combining of these extraneous costs into the freight itself has not been able to stem the decline in rates, which have slipped to fresh lows as refineries across Asia either shut or slow down production at many of their units.
Depending on the dollars per metric ton value for Worldscale rates, owners were getting an amount equivalent to anything up to 40 Worldscale points, in addition to the freight on the Persian Gulf-East Africa route, with these anti-piracy costs.
Rates have already declined by more than 20 Worldscale points after the costs were combined with freight, nullifying most of the gains the owners wanted to preserve.
Owners' daily earnings are now almost zero on the benchmark Persian Gulf-Japan round voyage compared with $5,000 a week ago. "Technically, the earnings on the round voyage are zero though no owner will currently ballast its ship to the Persian Gulf or India," an MR broker said.
It has been a swift U-turn in the fortunes of the tanker owners as rates were at a record high as recently as end-April. Refinery after refinery from the Persian Gulf to India and from South Korea to China have slashed output as consumption weakened drastically with the onslaught of the coronavirus pandemic.
As surplus production for export dried up, there were more than 40 MR tankers available for loading this week in North Asia alone. Owners' earnings have all but disappeared and they can barely breakeven.
In the latest deal, global oil major, Shell has taken two MRs at w55 each for naphtha loading next week on the Persian Gulf-Japan route. However, Shell executives could not be immediately reached for comment.
"We have never seen or heard of this [low] rate during the last 15 years," a broker in North Asia said. Earnings are zero at this rate and owners can just idle the ship, the broker added.