If there’s a subject that rivalled Scorpio Tankers’ surprise investment in VLCC owner DHT Holdings for equity analysts’ attention on this week’s earnings call, it was the issue of dirty tankers “cleaning up” to carry clean cargoes.
It’s a trend that dampened Scorpio’s earnings over the summer, as it did for other product tanker operators — particularly those with LR2s.
The burning question, at least in the mind of Evercore ISI researcher Jonathan Chappell: was this more of a one-off or a repeatable occurrence that could cap market upside for Scorpio other peers going forward?
The man who bore the brunt of answering that one — or at least giving it a try — was Scorpio chief commercial officer Lars Dencker Nielsen.
Although his reply was far from conclusive, it was an interesting take on a hot topic.
First off, Dencker Nielsen drew a distinction between something that typically happens in the market and the unusual circumstances that made last quarter different.
VLCC and suezmax newbuildings emerging from Asian yards have made maiden voyages with clean cargoes before and will again, he stressed.
“The fact of having newbuildings coming into the market, be it suezmaxes or VLCCs, has been something that has been going on for years, right? When you have a completely virgin tank, people will be able to load the gas oils, etc,” Dencker Nielsen said.
“We anticipate that to happen going forward as well, but that’s just par for the course. That’s normal. We don’t consider that to be a big issue. I think there’s a number of suezmaxes coming out next year and very few VLCCs.”
But, the chartering man said, that’s not the biggest part of what’s just happened.
What caused market disruption is the number of VLCCs and suezmaxes already trading dirty that made a commercial decision to clean their tanks to haul clean products “at great expense”, Dencker Nielsen said.
“The spread between the clean and the dirty market had to be great to be able to take the risk in terms of spec, the time that it would take to clean up the vessels, and also the type of cargo that you have to load has to be able to manage an uncoated vessel,” he said.
“We had a huge market on LR2s in the middle of the year, around June or July. The crude market at that point in time was languishing, and there was a massive spread where traders could say, ‘we’re willing to take that particular risk’.”
Scorpio saw about 65m barrels moving on between 32 and 35 suezmaxes and 14 VLCCs: the equivalent to between 86 and 90 LR2 cargoes.
“This impacted, of course, the LR2 market and the MR market, to some extent also the LR1 market,” Dencker Nielsen said.
The good news Scorpio was able to deliver to analysts is that this trade is evaporating as clean rates have come off and the crude market has firmed.
Of about 45 crude vessels that moved into the trade, 32 already have moved back to crude or are expected to, Scorpio head of investor relations James Doyle said.
“We do not expect additional vessels to clean up and carry refined products, as the off-hire time, cleaning costs and trading limitations make this unattractive at current rate levels,” Doyle told analysts.
The explanations still left Chappell hungry for more answers.
He asked: “Is this going to be a risk for seasonal shoulder periods going forward, the ability to move back and forth that quickly, especially of ships of that size.”
Dencker Nielsen said: “When it comes to these huge, immense spreads that we saw in the middle of the year between VLCC and LR2, that could happen again.
“Then you would have to have a stronger view on where you think the VLCC market is going as we move into the fourth quarter and the first quarter.”
Dencker Nielsen added that Scorpio’s view of crude-market strength is a lot more positive than it was a year ago.
That also carries a strong tie-in with the other major subject on the call: it explains why Scorpio would take a passive 4.9% stake in DHT, a pure-play owner of 28 VLCCs.
