Low appetite for crude oil and dry bulk commodities in China will keep a lid on next year's shipping rates, which are steaming toward their lowest fourth quarter since pandemic-hobbled 2021.
China remains the world's top oil importer, receiving about a quarter of what oil tankers carry on a given day, but the country's oil consumption is slowing. China's turn toward electric vehicles, LNG-powered trucks and high-speed rail will continue to eat into the country's oil demand, even as its economy continues to grow.
China's economy is expected to expand by 4.7pc in 2025, below this year's 4.9pc, but the country's oil demand is set to rise by only 2pc.
In September-November this year, China's waterborne crude imports dropped by the equivalent of 10 2mn bl very large crude carriers (VLCCs) per month. And with the Chinese government's decision to cut rebates for refined product exports to 9pc from 13pc, the country's refiners will be further discouraged from importing crude.
The lack of China-bound cargoes has lowered the average VLCC rate on the Mideast Gulf-China route to $1.64/bl so far in the fourth quarter, its lowest fourth quarter level since 2021 and down by 25pc year over year.
While longer-haul tanker voyages resulting from Houthi attacks in the Red Sea and sanctions on Russian oil will continue to exert upward pressure on the tanker market into next year, barring any geopolitical breakthroughs, the lack of crude cargoes to the world's top oil importer will keep crude freight rates subdued.
VLCC weakness is trickling down
Rates for 1mn bl Suezmaxes and 700,000 bl Aframaxes are feeling the pain too as those segments compete with VLCCs in many regions such as the US Gulf coast, west Africa and the Middle East.
Like the Mideast Gulf VLCC market, the US Gulf coast-Europe Aframax rate for 90,000t cargoes is on track for its lowest fourth quarter average since 2021 as well, falling by 20pc to $3.47/bl from a year earlier.
The weakness will not be confined to the dirty tanker market. Next year, low dirty tanker rates will likely continue to encourage ship operators to move more VLCCs into clean freight service. This typically rare practice has become more common this year and is putting downward pressure on the product tanker market. So far in the fourth quarter, the Mideast Gulf to Asia-Pacific clean long range (LR1) rate is down by 31pc year over year and the US Gulf coast-Chile clean medium range (MR) rate is down by 29pc.
With shipyards delivering 2-3pc of existing tanker capacity to the water next year, the tanker fleet is likely to be sufficiently supplied to meet the world's ocean-going oil transportation demands unless tanker scrapping activity accelerates. Demand for older tankers plying sanctioned trades and middling scrap steel prices are keeping mass tanker demolitions in check.
Dry bulk operators feel China housing blues
In the dry bulk market, fleet growth of around 3pc will be enough to accommodate what is expected to be modestly increased demand for shipping dry commodities such as iron ore, coal, and grains next year.
China plays an even more outsized role in the dry bulk market because it receives nearly 45pc of the world's dry bulk cargoes. The country's bearish real estate sector threatens the dry bulk market's largest demand driver, iron ore.
A 10pc decline in investment in its real estate sector this year spells weak construction demand in the next and bodes poorly for dry bulk ship operators hoping for a resurgent appetite for iron ore to make steel.
Sluggish growth in China-bound iron ore shipments has already helped pull the Brazil-to-China Capesize iron ore freight rate down by 15pc to $21.30/t so far in the fourth quarter from a year prior. Capesize operator earnings have fallen below $10,000/d, near operating expense levels, for the first time since August 2023.
