The deadly coronavirus affecting China is likely to reduce the demand for oil and refined products dragging down freight rates worldwide, market participants said Wednesday.

The general perception among the brokers, owners and charterers is that the epidemic may last several weeks or even months and the strain is already showing with several airlines cancelling their flights to several Chinese destinations.

Shipments of clean products such as jet fuel and gasoline will be hit as less people travel within, into and out of the world’s most populous country and pull down freight, they said.

Damage assessments for oil demand vary from “moderate” to “catastrophic” and “we are in the moderate camp for now,” Lars Bastian Ostereng, an Oslo-based analyst with Arctic Securities said in a recent report.

Demand is also taking a triple hit from the virus, mild winter and a lack of impact from the sulfur regulations for marine fuels, he said.

However, these are transitory and a full year downside to growth in global crude demand is limited, he added. According to Arctic Securities, global crude demand is expected to rise this year by 1.3 million-1.4 million b/d versus 2019, though around 200,000-300,000 b/d lower than a previous projection.

Nevertheless, the shipping industry is already worried by this bad start to the year.

LOWER DEMAND, LESSER FREIGHT

“The outlook does not look good from the demand side,” said a clean tankers broker in Dubai.

Gasoil and jet fuel are two commodities regularly moving on clean tankers from the West Coast of India, North Asia and the Middle East to Europe and Singapore. Trade in these along with gasoline and naphtha is an important barometer in determining the freight rates.

India has been exporting more than seven million mt of jet fuel for the last three successive years and exporters are now worried about a drop in inquiries.

Now there will be less movement of cargoes as refineries are already planning a cut in run rates in China and beyond. This is putting more burden when there is already an oversupply of ships, said a ship broker in South Korea.

The coronavirus outbreak has come at a time when China is ramping up its refining capacity and greenfield projects are starting operations. A case in point is 400,000 b/d Zhejiang Petroleum & Chemical refinery in December 2019.

UNSOLD SURPLUS

Sluggish local markets will leave more surplus barrels for export from China but there is a limited demand elsewhere due to slowing global economic growth, said a tankers’ broker in Beijing. This will leave Chinese refineries with no option but to reduce output, which in turn will drag down crude imports and hit the earnings of tankers.

According to international trade estimates, China’s share in Global GDP is now around 19% compared with 9% in 2003, when the SARS epidemic had struck.

China’s crude throughput rose 2.6% last year to around 603 million mt and refined products exports jumped 20% to over 55 million mt with almost 99% of the export quotas utilized, according to government data.

It is this exports and output performance which is under threat as Chinese refineries cut output and try to resell crude cargoes purchased earlier, said Masood Baig, director of Singapore-based Straitship Brokers.

“The road from feast to famine is a short one in the tanker market with VLCC spot earnings falling,” Arctic’s Ostereng said.

VLCC owners are currently earning around $19,000/day on the Persian Gulf-East Asia routes, which is around a fifth of the $105,000/day at the beginning of the year, according to the estimates of brokers. In clean tankers, the daily earnings for the Long Range, or LR ships have slumped to $4,000-$7,000 on the benchmark Persian Gulf-Japan route from around $18,000 early last month for Long Range I, or LR1 ships, the estimates showed.

To be sure, the decline in rates was already happening before the latest epidemic but its spread will make recovery all the more difficult and increase the downside potential.

To make matters worse, ships are reluctant to call on Chinese ports.

Port restrictions have made crew change difficult and the fluid situation makes crew coordination efforts futile, said Christina Cheh, Vice President for Global HSEQ at Wilhelmsen Ship Management. HSEQ is Health, Safety, Environment and Quality.

“Until the best solution is found, we have extended the current crew contract within the limits of the MLC,” Cheh said. MLC, or the Maritime Labour Convention is an international maritime law.