Analysis: Tanker market looks for a new way to tackle higher ECA charges

As the shipping industry starts implementing the new shipping SECA (Sulfur Emission Control Area) regulations, confusions still appears to reign on the standard for the representation of freight rates in charter-party agreements.

The biggest adjustment has come in the clean tanker market, where Worldscale freight rates have been significantly altered by the regulations.

“There is a search for one universal way to tackle the ECA expenses,” said a clean shipowner.

He said some charterers still choose to pay ECA charges in a lump sum on top of the main freight bill, while others only compensate owners in line with the current spread between 380 CST and 0.1% sulphur bunkers rather than using annual numbers from Worldscale terms.

Yet others make the owners pay the whole bill, but compensate them with a higher Worldscale rate for the laden leg of the journey.

Shipping sources said this latter method, referred to in the market as ECA laden leg inclusive rate, is quickly becoming the most prevalent.

The Worldscale Association said in October a fixed differential of $48.35 per mile steamed in the Northwest European SECA zone should be used to represent the extra cost of burning 0.1% gasoil within the zone compared to the 380 CST fuel oil grade delivered basis Rotterdam used to calculate Worldscale flat rates.

This figure is generally used in chartering deals and can translate into substantial expenses for the party taking up the bill.

SHOWING MONEY

To illustrate the numbers, the following is a Platts calculation of generating an ECA inclusive rate, basis a Primorsk-Amsterdam Handysize voyage.

The Baltic-UK Continent route, basis 30,000 mt, was assessed at w210 non-ECA on January 23.

To generate the ECA inclusive rate, the cargo size is multiplied by the flat rate of $9.86/mt (Great Belt/Sound routing) and Worldscale multiplier of 2.10.

This gives a lump sum of $621,180.

On top of that, the Worldscale ECA fixed differential of $48.35/mile is multiplied by the laden mile distance between the two ports of 1,405.5 miles, producing a figure of $67,956. Adding the two together comes to a total of $689,136.

This is divided by the cargo size and multiplied by the flat rate of $9.86/mt to produce a Worldscale multiplier of 2.329 or a rate of w233.

The difference between the ECA laden leg inclusive and non-ECA rate is therefore 23. Most participants use a w20 differential as a rule of thumb.

Sources said Handysizes and Flexisizes operating only in the Baltic and UKC ECA zone had the largest rate impact in terms of ECA inclusive rates.

On the other hand, the Trans-Atlantic MRs and LRs have not been influenced as much, as their exposure in the ECA zone is a fraction of their voyages.

Shipowners are still trying to get compensated for the ballast leg of the journey, but so far this has not become a widespread practice, sources said.

BALTIC AFRAMAXES

For dirty Aframaxes operating on the highly liquid Baltic-UK Continent route, charterers have in many cases been prepared to pay the SECA costs stipulated by Worldscale to the shipowner for the actual ballast done by the ship, as well as the laden leg of the voyage.

This can be advantageous for shipowners because of the reduction in the actual premium of gasoil over 380 CST fuel oil against the one set out by Worldscale in October.

“Its all been running smoothly so far. It is good money on ECA for a voyage like Primorsk-Bilbao, which we did recently, as we got paid a constant value [based on the Worldscale differential] but the actual money we paid for bunkers was much lower,” said a shipowner.

Shipowners say falling bunker prices have created a temporarily lucrative position for them, but one that would be addressed in 2016.

“The picture can be very different in future. In 2007 bunkers cost $300 according to Worldscale while they rose to $700 in reality. Either the charterer or the owner will benefit and then the situation gets corrected by Worldscale the following year,” said the shipowner.

Even though the new ECA rules have created extra costs for charterers, thus far they have been happy to foot the bill, in part because ultimately it may be possible to pass the cost down the line to refineries.

“There is an element of cost to it, but it is the same as if port costs rise for example. It does squeeze margins a bit. But the cost of the ECA clause to a charterer is not that big when you consider you might be carrying $130 million worth of oil,” said a charterer

“Also the oil company chartering the vessel will just pass on the extra cost to the end receiver at the refinery. And then the refinery might pass on their extra costs by charging more for their end products. So the costs just get passed down the line until they get to the consumer,” the charterer added.

Sources in the dirty market say Worldscale freight rates have been unaffected by implementation of the regulations.

“Maybe if a charterer was only prepared to pay the SECA costs for the laden leg and not the ballast, then you might see a few extra WS points on a deal. That has not been happening so far thou gh,” said the charterer.