Rhys: Hello, and welcome to another episode of the Argus "Weight of Freight" podcast. I'm Rhys van Dinther. I'm the dirty freight reporter at Argus, covering the EMEA region.
Delia: Hello, and I'm Delia He. I'm the freight analyst over at Vortexa, specializing in dirty freight markets, as well as the [inaudible 00:00:24] sanctioned markets, and very happy to be joining Rhys here for this episode.
Rhys: Today we're gonna be mainly talking about the Suez Canal, and the developments that's been happening over there, and specifically around the kind of reopening and the re-transiting of the canal, and vessels through the Bab el-Mandeb Strait. We've seen a bit of change of hearts over there recently. We've seen the Suez Canal being mainly closed for most owners, for ages now. And then, recently, kind of the de-escalation of the Red Sea conflict, we saw people were thinking, is it gonna return? Are there gonna be ships going through there? And then I think we saw a little bit of a return, but most mainstream owners still weren't gonna go through. And then, ever since the Gaza conflict ceasefire kind of ended, there was a breach of the ceasefire there, then the Houthis said that they might resume attacks again. So, just to give a little bit of background there. My first question to you would probably be if you can see kind of a timeframe of if the full use of the Suez Canal's gonna come back at all?
Delia: Yeah. I mean, that was a really comprehensive context and coverage of what we've seen happening the Red Sea so far. And I guess all of us are aware, by now, the Red Sea situation is a highly volatile and highly speculative situation at the minute. So, unfortunately, there's no certain comment that I can offer here on when we can see a full use of the Suez Canal return. But what I can say is a couple of indicators to look out for, that would indicate that the situation in the Red Sea's stabilizing, and would therefore allow a return of Suez Canal transits, would definitely be falling AWRPs, as well as seeing more independent traders making the first move to transit through the Bab el-Mandeb. And these factors in combination would essentially help facilitate the process of more and more ship owners following suit, and returning to the Suez Canal transits.
Rhys: Do you think it would kind of work as one owner goes first and others follow? Or do you think there's gonna be one day when everyone says that it's kind of okay again?
Delia: I would anticipate that it takes a lot of courage, I would say, for the first mover in this scenario. As we know, obviously, I believe Argus has more insights into this. Currently, AWRPs are still at quite elevated levels. And given this, not only would it weigh on freight costs a little, in this regard, but also, it is an indication that the industry still perceives the Red Sea transits to be something of quite high risk. And if you factor in the risk appetites, and whether making a safe transit through the Red Sea is viable, I think, I do believe that we need to see more and more mainstream operators making that first move, to essentially signal to the wider industry, and signal to more ship owners, that this, in fact, the situation has in fact stabilized, and removes a lot of uncertainty out of the equation.
Rhys: And if you see a return in the near term of re-transits through the canal, which vessel sizes do you think are gonna be most affected?
Delia: Yeah. I think to answer the question, we would need to first look at the flows going through the Suez Canal. And in particular, I would say middle distillate cargoes headed towards the west of Suez does make up a significant share of northbound flows to the Bab el-Mandeb. And in this regard, I would say LRs would definitely be one of the vessel classes that will ultimately be heavily impacted by the return of Red Sea transits.
Rhys: So, with the possible reopening and re-transiting, the short-term effects might be quite small, as last time, we thought that we saw reopening, owners were still really hesitant to go through. But in the long term, we could see, as a reduction of voyage time, these ships are gonna return to the market a lot quicker, which might kind of, in the long term, pressure rates. What are your thoughts on that?
Delia: Mm-hmm. I would say something that I've seen play a great hand on freight rates have really been demand. In particular, if I were to refocus back on LRs, as I was mentioning earlier, European demand in particular has weighed pretty heavily on LR freight rates. And, I mean, I'm sure Argus has reported, [inaudible 00:05:33] has reported on this fluctuation heavily at the start of this year, where we essentially noticed that the westbound middle distillate cargoes headed towards Europe had essentially taken a rather steep drop-off, starting in December of last year, and petering out only recently, in March. And this drop-off in demand, in European demand, and therefore very muted fixing for LRs headed east to west, caused a 26% month-on-month tumble in east-west ton-mileage for LRs in February of this year. And this had a direct impact on LR freight rates. And this is despite the continued rerouting around the Red Sea, and continued addition to voyage distance and voyage duration traveled on these LRs. So, I would say when it comes to the impact of reopening of Red Seas on freight rates, it's kind of a more multifaceted picture, if you would, due to the multiple combination of factors we are seeing at play here. It's not just voyage distance, quite clearly, as we have seen this year. It's a combination of voyage distance, it's a combination of healthy European demand, in this particular case.
Rhys: And just going back to what you were saying about flows earlier, there's obviously gonna be some sort of reshuffling of trade patterns between Aframax, Suez, and VLCCs. Could you just speak a little bit more on that?
Delia: Yeah.
Rhys: Yeah? Which kind of, what are we gonna see more of? What are we gonna be seeing less of?
Delia: Mm-hmm. So, I would say the flow that would be most impacted by trade reshuffling, given the reopening of the Red Seas, would be crude flows. So, just to give a bit of context here, we know that prior to the Red Sea attacks, we were seeing the Mideast Gulf to Europe crude flow being quite dominant in this regard. But with the Red Sea attacks, and closing of Bab el-Mandeb transits, we have instead seen that Mideast Gulf crude barrels have been more and more replaced, increasingly replaced, by Atlantic basin crude flows going into Europe. And this had essentially meant that Suezmaxes have lost a huge pie of their utilization.
And bringing in VLCCs to the mix, we've essentially seen that, because Suezmaxes carrying crude barrels, lifting crude barrels in the Middle East Gulf towards Europe, now have to reroute around the Cape of Good Hope. This added voyage distance and voyage duration meant that VLCCs became more and more the lucrative and commonsensical choice, due to economies of scale. And so, in that sense, what we're essentially seeing right now, since the start of this Red Sea attacks, is that Suezmaxes have been increasingly cornered into trans-Atlantic crude trade, bringing crude from the Gulf of Mexico and South America, for instance, into Europe, whereas they've really lost a huge market share in taking Middle East Gulf crude barrels into Europe, due to VLCCs cannibalizing on this longer trade route.
So, to answer your question, a key reshuffling in trade patterns that I would anticipate seeing, given the reopening of the Red Sea transits, would be really a return to normality for Suezmaxes, given that they can now transit through the Bab el-Mandeb, lifting Middle East Gulf crude barrels back into Europe. And this would obviously come at the expense of the Atlantic basin crude flows going to Europe. So, there would be a net benefit to Suezmaxes. Essentially, what we're gonna see is an increased utilization on east-to-west routes, with the shorter-haul voyage distance really giving it edge against VLCC cannibalization. And the question would be, therefore, when Suezmaxes essentially vacate this trans-Atlantic trade, they would also indirectly give support to the Aframaxes, essentially leaving this TA route, and the cross-Med route, to the Aframaxes again.
Rhys: That would be interesting to see, because at the moment, we've seen, from the CPC terminal for the last three months, the vast majority, about 80% of the cargo allocations have been for Suezmaxes, where they're usually more split, Afra/Suez, kind of 50-50. And we've seen, yeah, Black Sea, Med spot market rates in the Suezmax segment, they've pushed really high recently. And I'm just wondering if, with the kind of reopening, re-transiting of the canal, if this demand stays in the Mediterranean/Black Sea region, I'm not sure if there would be so much demand for anything southbound. So, what kind of flows are you seeing southbound through the Suez Canal, and where from?
Delia: Right now, I would say southbound flows through the Suez Canal even have remained at quite muted levels, to be honest. And looking in particular, as you're saying, the fixing of crude cargoes, if I caught that correctly, whether crude cargoes would flow east, and therefore support Suezmaxes, or Aframaxes in this instance, if the Red Sea were to reopen, I would essentially point that towards a low probability of happening. You mentioned CPC barrels, for instance. We know that CPC barrels have been flowing into the Pacific basin. And in that regard, the east of Suez already has ample supply, with CPC barrels going into Korea, for instance. And we know that in the Pacific basin, there is a plentiful supply of discounted barrels coming out of sanctioned markets, that have continued to flow towards really massive markets within the east of Suez, China, and India, namely. So, I would err on the side of caution, and say despite lower freight costs, given the shorter voyage distance with Red Sea transits resuming, I would say that currently, there is rather little indication to support a picture that would cause a surge in such a flow coming out of, let's say, the Mediterranean towards the east of Suez.
Rhys: Okay. Thank you for that. I'm gonna have to stop us there, because we have run out of time, unfortunately. But it was very nice to have you on. So, thank you very much. And, yeah, we'll see you next time. Thank you for listening.
