Freight to spurt if tankers rerouted via cape on war risk: sources

The global oil tankers industry has mostly included the longer route of Cape of Good Hope as an option to move cargoes to Europe from the Persian Gulf and the Red Sea, which if exercised can push up the freight by over 10% in the near term and even much higher over the next few months, several market participants said Dec. 18.

The decision comes on the back of a series of attacks with alarming regularity on ships passing through the Red Sea over the last two months. From automobile carriers to containers and dry bulkers to tankers, several commercial ships have been attacked as war rages in Yemen and Gaza, prompting owners, insurers and crew managers to sit up and take precautionary initiatives.

"It is not just Maersk [Tankers] which is including the Cape [of Good Hope] option in their charter party agreements, several other players have gone ahead to do so," said a tankers' broker involved in such deals.

Maersk Tankers had announced late last week the use of such an option at their discretion, if the security situation warrants in future.

"Our fleet has also included the Cape option [for the voyage] and if exercised there is an additional freight of up to $400,000," said a source with a major clean oil tankers' owner. He was referring to the highly popular Middle East and India to Europe routes on which more than 45 million mt of refined products, mostly gasoil and jet fuel are moved annually.

The Persian Gulf-UKC route was Dec. 15 assessed at $3.45 million and $4.3 million for LR1s and LR2s respectively by S&P Global Commodity Insights and an additional $400,000 can translate into a 9%-12% increase for each voyage.

Cascading effect

For VLCCs, which move crude from the Persian Gulf to Europe, the premium for moving cargoes via the Cape is typically two Worldscale points but in the current situation could be higher, brokers said.

The situation is being monitored and loadings in Red Sea's Bashayer port may get affected, said a source with an Aframax owner.

Owners are in a dilemma on whether to just ballast back westwards to pick up their next cargo or load one in the Red Sea at a premium freight, another source added.

While the additional freight kicks in only if the longer voyage option is exercised but a chartering executive pointed out that it is only the "tip of the iceberg".

If tankers start undertaking voyages that are longer by 11-15 days depending on ship sizes, it will tighten supply and the "freight may explode", the executive said.

However, charterers and owners also point out that part of the additional costs incurred while moving via the Cape is offset by the hike in the Suez Canal tariff. They cite the example of LR2s, where this tariff of around $520,000 will be saved but at current bunker prices, $300,000 additional will be spent on fuel while moving via the Cape, resulting in net additional income for the owners.

Charterers contend that owners will still be better off in daily earnings, which will keep increasing due to the longer voyages.

Insurance and carbon

The potentially higher costs of transporting commodities are not restricted to freight alone. One of the charterers said the Additional War Risk Premium, or AWRP, has already gone up by six to 10 times in the last two months for passing through the Gulf of Aden, depending on the value and size of the ship.

"The AWRP in the Persian Gulf is stable but has spiked in the Red Sea," the charterer said.

The war zone risks come at a time when the industry is already grappling with an upcoming carbon emissions tax in Europe.

Some of the owners have already started charging separate amounts for this purpose, ranging between $50,000 and $100,000 for each voyage. Sources confirmed that if the Cape route option is exercised, the carbon charges will be higher due to the increase in emissions.

Crew's discretion

Unlike containers, so far no such voyage has been done via the Cape for LRs moving gasoil and jet fuel from the Persian Gulf and Red Sea to Europe, said another source involved in such deals. The situation is changing not on a daily but hourly basis and voyage re-routing can happen anytime, the source said.

In the currently evolving situation, the charterers do not have a choice because it is the tanker's master and crew who will decide depending on the safety considerations, the source said. If the charterers want to get the cargo moved, and the situation warrants rerouting, they will have to pay the higher amount, decided based on negotiation, he said.

An executive who charters out tankers for his company said the main concern is for ships which are already in transit and Cape option clause is not there in the charter party agreement. In such voyages, additional expenses will be on the owner's account, he said.