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In topsy-turvy commodity trades, small ships outperform big ships

Size matters in tanker and dry bulk markets. So far this year, smaller is better

Larger crude tankers continue to suffer very low rates (Photo: Shutterstock)

You pay more to get more. Renting a four-bedroom townhouse is far more expensive than renting a studio apartment. The nightly rate for a penthouse suite is much higher than for a standard room.

So, in ocean shipping, you might expect booking a load of coal on a mammoth dry cargo vessel would cost a lot more than on a bulker carrying less than a third the volume. Or that a spot voyage deal for a supertanker carrying over twice the volume of crude oil, or a product tanker carrying over twice the gasoline, would be way more expensive than on a smaller ship.

This year, you’d be wrong. Spot employment for smaller bulk commodity ships costs more than for larger ships — in most cases, a lot more.

Rates for large ships vs. small ships

According to Clarksons Platou Securities, spot rates for 10-year-old very large crude carriers (VLCCs, ships with capacity of 320,000 deadweight tons, or DWT) averaged the equivalent of just $1,400 per day year to date (YTD) through Tuesday.

Aframax tanker NS Consul (Photo: Flickr/Kees Torn)

Spot rates for Aframax crude tankers (115,000 DWT) — which hold over 60% fewer barrels than VLCCs — were 15 times higher: $21,300 per day YTD. 

In the product tanker sector, spot rates for larger vessels known as LR2s (115,000 DWT) averaged $26,200 per day YTD for 10-year old vessels. That’s 10% lower than rates for medium-range (MR) product tankers (50,000 DWT) with less than half the cargo capacity of an LR2.


Clarksons’ data shows the same disparity in dry bulk shipping.

Spot rates for larger bulkers known as Capesizes (180,000 DWT) averaged $18,100 per day YTD. Rates for Supramaxes (56,000 DWT), which have less than a third of the capacity of Capesizes, averaged 49% higher: $26,900 per day. 

The dry bulk market is “upside down [compared to] normal trading patterns,” noted Stifel analyst Ben Nolan in his latest quarterly earnings preview.

Megasized bulk commodity ships traditionally earn more than smaller ones because they move so much more volume per voyage. The reason this year is “upside down”: Different size categories carry different bulk commodities and/or ply different routes. The supply-demand balances for the various trades currently favor smaller tankers and bulkers. Such a reversal of fortune happens from time to time but rarely in such a sustained and across-the-board fashion.

Crude tankers

VLCCs serve long-haul, high-volume crude trades such as Middle East to Asia and U.S. to Asia. Smaller tankers don’t have the same scale efficiencies and serve shorter routes, but they’re much more versatile than VLCCs in terms of terminals that can fit them.

VLCC underperformance versus smaller crude tankers has been ongoing since early 2021. “The oil markets seem to be conspiring against the VLCCs,” wrote Erik Broekhuizen, manager of marine research at Poten & Partners, in a recent report.

“VLCCs have traditionally been the bellwether of the tanker markets. The largest crude-oil-carrying ships were usually the leading indicator of where the markets were heading. This changed during the pandemic.”

The VLCC Al Yarmouk (Photo: Jim Allen/FreightWaves)

VLCC rates are getting hammered from both sides: supply and demand. On the supply side, brokerage BRS said there will be 48 VLCC newbuild deliveries this year, 25 of which have already hit the water. Only one VLCC had been scrapped and three sold for scrap through May.

On the demand side, OPEC continues to limit seaborne exports and COVID lockdowns have hit Chinese fuel demand. Broekhuizen noted that “China, the world’s largest VLCC employer, has cut back on purchases from West Africa, Latin America and the U.S.”

Meanwhile, the Ukraine-Russia war has been a boon for sub-VLCC tanker classes as Russian exports continue to flow.

Aframaxes account for 85% of Russian crude exports, according to BRS. India is replacing imports that used to ship from the U.S. aboard VLCCs with imports from Russia aboard Aframaxes as well midsize Suezmaxes (tankers that carry half the volume of VLCCs). Europe is replacing some Russian crude imports with U.S. crude carried aboard Suezmaxes, reducing volumes available to ship from the U.S. to Asia aboard VLCCs, according to Broekhuizen.

Product tankers

The rate advantage for smaller tankers is also driven by higher shipping demand for refined products than for crude, as consumption of gasoline, diesel and jet fuel recovers from pandemic levels. (In terms of tanker scale, the larger product tankers, LR2s, are the same size as the smaller crude tankers, Aframaxes.)

The premium for smaller versus larger product tankers is being partially fueled by strong demand for U.S. refined product exports in western South America, driving high volumes via the Panama Canal aboard MRs.

“MR product tankers earned as much in the last nine weeks as they did in the entirety of 2021,” wrote Nolan on Sunday. “Should the market for product tankers and Aframax [crude tankers] remain at current levels, it could be a year for the record books.”

Dry bulk

Dry bulk is the world’s largest freight market by volume. It features a particularly differentiated cargo mix based on ship size.

Capesizes are highly dependent on iron-ore cargoes — mostly from Australia and Brazil to China — and secondarily, coal and bauxite.

Sub-Capesize bulkers carry a much more diverse range of cargoes (grains, coal, cement, steel, salt, ores, logs, fertilizer, phosphate, aggregates, alumina, copper, salt). They also call on a much more diverse range of destinations. 

Iron ore being unloaded from a Capesize bulker in China (Photo: Shutterstock/Ambient Pix)

Whereas Capesize rates hinge on Chinese demand, smaller bulkers are more linked to global GDP. Smaller bulkers have also benefited from cargo that used to be containerized but switched to bulk to save on freight.  

According to BRS, dry bulk volume to China in the first half of 2022 fell 9.2% year on year amid COVID lockdowns. Capesizes have “unperformed on the back of easing [port] congestion, China’s slowing appetite for iron ore and coal, and weather- and COVID-related supply disruptions in Brazil and Australia, respectively.”

China imports iron ore and coal aboard Capesizes to produce steel. With the country’s housing market under pressure, Chinese steel production fell 8.7% in January-May versus the same period last year.

Maritime Strategies International (MSI) pointed out that freight rates have been so strong for smaller bulkers versus larger ones this year that “even a shipment of logs, typically carried in Handysize [under 35,000 DWT] or Supramax bulkers, was carried from Uruguay to China in a 205,000 DWT bulker in April.”

Outlook for large vs. small tankers

If history is any indication, larger commodity ships will regain their premiums.

Frode Mørkedal, analyst at Clarksons Platou Securities, predicted that VLCCs will rise “like a phoenix” and “prosper.”

Aframax tanker Gold Sun arriving in Houston (Photo: Jim Allen/FreightWaves)

Regarding the 10-year-old VLCCs averaging a paltry $1,400 per day this year, Clarksons forecasts rates will rebound to $41,000 per day next year (78% higher than Aframaxes) and $55,000 per day in 2024 (90% higher than Aframaxes).

According to Broekhuizen, “In the long term, the economies-of-scale benefits of VLCCs will bring this segment back to prominence.

“The dominant oil producers in the Middle East and the fastest growing consumers in Asia all have the infrastructure to use VLCCs. They will use the largest-available vessels to minimize the delivered costs.”

And on the supply side, the orderbook for new VLCCs is historically small. This guarantees exceptionally low fleet growth, a big plus for future rates. Deliveries for 2023-2024 are already set, due to construction lead times. There are just 15 new VLCCs due next year and only three in 2024, according to BRS. No VLCCs are on order for 2025 or later.

In the product tanker market, the gap between LR2s and MRs has already narrowed. Demand for long-haul cargoes of refined petroleum has risen, boosting LR2 rates. The premium of MR earnings to LR2 earnings was much higher in April than it is today. Clarksons predicts that larger product tankers will once again outperform smaller product tankers in 2023-24.

Outlook for large vs. small dry bulk ships

The rate gap has also narrowed between larger and smaller dry bulk carriers. In dry bulk, though, it’s more about rates for smaller ships coming back down toward larger-ship rates, as opposed rates rising for larger vessels.

Geared Handysize bulker Maple Ambition in New Zealand (Photo: Flickr/Bernard Spragg)

Nolan expects that “Brazilian and Australian iron ore [shipments] should increase,” a plus for Capesizes going forward, while “some of the spillover [of container cargo to bulkers] should ease,” a negative for smaller vessels.

BRS also cited the connection with container shipping, where spot rates have fallen from their peaks. “The easing of the container-ship market would reduce pressure on bulker employment for de-containerized cargo,” the brokerage noted.

Clarksons expects larger bulkers to once again earn more than smaller bulkers in 2023-2024. But unlike its outlook for VLCCs, it does not foresee a big rate increase.

According to Clarksons’ Mørkedal, “We expect Capesize spot earnings to average $23,000 a day in 2022, then fall to $22,000 per day in 2024 before rising slightly to $24,000 per day in 2024. In other words, a reasonable freight market — as the majority of companies’ financial breakeven [rates] are between $13,000 and $14,000 per day — but an unimpressive market development overall.”

Click for more articles by Greg Miller 

A cargo of corn being loaded aboard a bulk carrier (Photo: Shutterstock/Alexey Lesik)

Greg Miller

Greg Miller covers maritime for FreightWaves and American Shipper. After graduating Cornell University, he fled upstate New York's harsh winters for the island of St. Thomas, where he rose to editor-in-chief of the Virgin Islands Business Journal. In the aftermath of Hurricane Marilyn, he moved to New York City, where he served as senior editor of Cruise Industry News. He then spent 15 years at the shipping magazine Fairplay in various senior roles, including managing editor. He currently resides in Manhattan with his wife and two Shih Tzus.
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