charter-rate-increase
Structural Tonneau Shortage
The market for medium-range (MR) oil tankers is going through a critical phase characterized by the simultaneous decline of obsolete assets and the immobilization of new capacity in shipyards. Scorpio Tankers has announced the sale of four vessels built in 2014, including the STI Battery and STI Venere, for $32 million each, removing tonnage from the market that could have been renegotiated at lower rates Scorpio Tankers. At the same time, Asyad Shipping has liquidated three of its oldest ships for $178 million, accelerating the replacement with orders that will not be operational before 2030 Splash247. This fleet renewal reduces the available supply in the secondary market, forcing charterers to compete for a smaller pool of vessels.
The replacement of old capacity does not immediately fill the gap. Top Ships has ordered nine eco-MR vessels of 47,499 tdw from China, with deliveries expected in 2028 and 2029 for a potential contract value of approximately $679 million Hansa News. Another significant order, backed by Shell and managed through Minsheng Leasing, involves five 49,900 DWT vessels with a total value of $230 million New Vessels. The time lag between the removal of old ships and the entry into service of these newbuildings creates a capacity gap that is directly reflected in short-term charter rates.
The Dynamics of Freight Rate Increases
Inflation in freight rates is not solely driven by the demand for goods, but also by the rigidity of the supply of vessels. With new constructions blocked in Asian shipyards for a period extending until 2030, vessel owners are forced to renew existing contracts or access the spot market under disadvantageous conditions. The lack of immediate alternatives for MR tonnage transforms freight from an operational variable into a structural fixed cost.
The underlying mechanism is simple but impactful: the scarcity of vessels suitable for refined and chemical product cargoes limits the ability of vessel owners to optimize routes. When a unit is not available, the cargo is diverted to older ships or less efficient routes, increasing the unit transportation costs. This scenario is exacerbated by the concentration of shipbuilding in a few Chinese shipyards, such as Guangzhou Shipyard International, which manage orders for billions of dollars, slowing down the market’s flexibility in responding to sudden shocks.
Impact on Working Capital and Margins
The increase in MR freight rates directly impacts the Cost of Goods Sold (COGS) and working capital management. Ship operators with short-term or spot contracts immediately experience the impact of rising rates, while those with long-term contracts see their renewal costs increase significantly upon expiration. The difference between current and historical freight rates represents a gross margin that is eroded and must be absorbed by logistics companies.
For financial directors and supply chain operators, forecasting transportation costs becomes less reliable. The uncertainty surrounding MR rates, due to the shortage of ships, requires a greater allocation of capital to ensure operational continuity. The need to secure tonnage at high prices reduces the liquidity available for other operating investments, increasing the implicit cost of money associated with transportation operations.
Key Indicators and Future Scenarios
The MR fleet monitoring should focus on the delivery times of newbuildings and the sales of used ships. Any delay in deliveries from Chinese shipyards or any additional sale of obsolete units by operators such as Scorpio or Asyad will contribute to maintaining high charter rates. The market’s ability to absorb these costs will depend on the global demand for refined products and the availability of alternative, efficient routes.
The current situation suggests that MR freight rates will remain sensitive to supply shocks until 2029, when newbuildings are expected to enter service. Until then, the optimal strategy for charterers will be to extend the operational life of existing ships or diversify sourcing to reduce reliance on MR shipping.
Photo by boris misevic on Unsplash
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