Indian oil refiners jolted by five-fold rise in freight rates

Indian oil refiners, including Reliance Industries Ltd (RIL), Indian Oil and HPCL, could see a surge in crude tanker rates, which will hurt their margins, after the US sanctioned some units of Chinese tanker giant COSCO in late September, restricting tonnage supply across the globe.

Spot rates for hauling cargo on oil super tankers, aframaxes and suezmaxes have jumped five-fold after the US sanctions took effect. Crude tanker operators are having the best time in more than a decade, but the measure will hurt refiners, whose annual shipping bills had been kept low for years by low tanker rates.

The US action was directed at two units of COSCO, which operates more than 50 tankers, on the ground that they had violated US sanctions on Iran. Freight rates to ship oil on super tankers, particularly to Asia, have surged as a result. The impact has trickled down to aframax and suezmax tankers.

Consequently, the rates for very large crude carriers rose to $130,000-140,000 a day from $25,000-30,000, while suezmax rates jumped to $70,000-80,000 a day from $15,000-20,000.

Bharat Oman Refineries Ltd, which runs Bina Refinery, booked Great Lady , a very large crude carrier run by Eastern Mediterranean Maritime, for an Arabian Gulf to West Coast India voyage from October 22, for $277,305 per day. “This shows the desperation of the charterer (Bharat Oman) to take whatever is available in an extremely tight market,” said a shipping industry source.

Desh Vaibhav , an oil super tanker owned by state-run Shipping Corporation of India (SCI), was hired by American conglomerate Koch Industries, Inc for an Arabia Gulf to Korea run from November 5 at $123,150 per day.

Indian Oil Corporation (IOC) fixed two very large crude carriers for voyages to Paradip in November for $9.5 million, or $90,000 a day, and $8.75 million, or $97,500 per day, respectively. HPCL hired an oil super tanker for a voyage to Visakhapatnam later this month at $9.95 million. IOC also hired a suezmax tanker for a voyage in November at $5.51 million.

“The market is red hot now and fleet owners are having a ball,” said another industry official. “Those whose ships are on the spot trade will make a killing,” he said.

Seven suezmax ships and three of the five aframax tankers owned by The Great Eastern Shipping Co Ltd are operating in the spot market. SCI has a few of its very large crude carriers and suezmaxes in spot trade.

SCI will also enjoy some benefits of the rising freight rates, even on one-year tanker charters, because such deals typically have a “market reset clause linked to a floating benchmark” to account for sharp rate increases.

“This is the first time in a long time that we have seeen such a surge in a short span. The last we saw such a boom was in 2008, although it was very gradual back then; but this time, it has been sudden,” the official said.

Tight market

Refiners will have to shell out more, he added. “The market is very tight because a sizeable number of tankers have gone out of trading due to the ban on the COSCO units and the reluctance of charterers to hire ships with Venezuelan trading history. Also, with the new rule for ships on using low sulphur fuel mandated by the International Maritime Organisation (IMO) kicking in from January 1, many tankers have gone to the dry docks for fitting scrubbers. So, for the next six months, the tanker market is going to be very volatile,” he added.

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