LR1s seen heading towards the sidelines

LR1 product tankers, increasingly a niche shipping segment, were thrust back into the limelight last week with Scorpio Tankers’ decision to exit the sector, selling its 12-strong fleet to BW Group-controlled Hafnia.

New York tanker broker Poten & Partners has run the numbers on the dwindling global clean panamax sector, pointing out that economies of scale tend to be a key driver for changes in vessel segment usage.

“Long-haul marine transportation of commodities is all about economies of scale. Charterers will use the largest ship available to move their cargo to cut down on per unit transportation costs. That is the reason that all vessel classes get bigger over time,” Poten explained in its most recent weekly report, noting how, for instance, a typical VLCC used to be 270,000 dwt but now it is 310,000 dwt.

In many of their trading areas, LR1s are competing with larger LR2s. By far the biggest trade route for both LR1s and LR2s is the Arabian Gulf – Far East Naphtha trade. In 2021, Poten observed that LR2s significantly increased their market share relative to LR1s. This is also happening in other areas of the world.

“The reason is clear: it is much cheaper (on a $/MT basis) to move product on an LR2 relative to an LR1,” Poten observed.

In the first weeks of 2022, the difference in freight cost to transport naphtha from the Middle East to Asia is approximately $2.25 per ton. On a laden LR2 (75,000 MT) the savings are almost $170,000 per voyage, according to data from Poten.

The expansion of the Panama Canal is another factor that has had an impact. The expanded locks, which debuted in the middle of 2016, allow tankers up to suezmax size to use this shortcut.

“This effectively eliminates the raison d’être of Panamax sized tankers, including LR1s. Although this appeared to mostly affect the dirty product trade around the Panama Canal, it may also have reduced the appeal of the Panamax sized product tankers for owners,” Poten suggested.

Looking ahead, Poten warned that shipyards could stop marketing this ship type if owners do not order LR1s soon, leading to an ageing fleet. When the fleet ages, more vessels will move into the dirty trades as the quality of their coatings deteriorates over time.

Poten predicted that LR1s were likely to develop into a niche market for a small group of owners who serve particular charterers on a limited set of trade routes.

Sam Chambers

Starting out with the Informa Group in 2000 in Hong Kong, Sam Chambers became editor of Maritime Asia magazine as well as East Asia Editor for the world’s oldest newspaper, Lloyd’s List. In 2005 he pursued a freelance career and wrote for a variety of titles including taking on the role of Asia Editor at Seatrade magazine and China correspondent for Supply Chain Asia. His work has also appeared in The Economist, The New York Times, The Sunday Times and The International Herald Tribune.
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