Shipping and Chartering

Trafigura Maritime Logistics arranges shipping and freight services for Trafigura’s commodity trading teams and for third-party clients. It operates as a service-provider, securing competitive and reliable freight for in-house oil, metals and minerals traders. The Wet and Dry Freight desks also function as profit centres in their own right.

The fundamentals of the wet freight market improved during 2019, though not as rapidly as some participants had expected at the start of the year.

As we entered 2019, the Wet Freight desk saw a healthy winter market driven by weather delays, congestion in the Bosphorus Strait and oil arbitrage opportunities boosted by longer voyages required (tonne-miles).

Asian buyers replaced sanctioned Iranian barrels with crude oil from the West, supporting freight rates. However, this was offset by the negative effects of a continuously backwardated oil market throughout the year.

Trafigura’s Wet Freight Desk had its most profitable year on record, thanks to a healthy trading performance in the first half of the financial year, and to two landmark transactions with Frontline Ltd. and Scorpio Tankers Inc.

In 2019, in addition to significantly growing the time chartered fleet exposure, reflecting a constructive forward market view, we took delivery of 31 of the 35 new-build tankers that we had committed to on longterm leases in 2017. The remaining four ships will be delivered directly to Scorpio Tankers in 2020.

Competitively priced long-term leasing obligations including the attached purchase options on a total of 29 of the new vessels were transferred in exchange for equity in Frontline Ltd. and Scorpio Tankers Inc. respectively. A 30th vessel was sold to Spanish buyers who will take delivery at the end of the 2019 calendar year (no profit impact in FY2019), leaving Trafigura with long-term leasing obligations with purchase options on five Suezmax tankers.

In addition to the above 35 tankers, the Wet Freight desk took delivery of four Hyundai Heavy Industries-built, eco-scrubber fitted Very Large Gas Carriers throughout the year, again on long-term lease with purchase options. A further two dual-fuel VLGCs have been placed on order, with options for four more. These are expected to be completed and received by late 2021.

These transactions marked the continuation of Trafigura’s strategy of investing in structured arrangements (in this case through the use of external funds) in support of our commodity flows, then deleveraging the risk, while maintaining access to a number of the assets for our freight trading business. As stated elsewhere in this report, the net benefit from the ship to equity transactions was a contribution of USD201 million towards Group profit for the year.

We continued to fix about 70 percent of Trafigura wet cargoes on third-party tonnage and Trafigura-controlled tonnage was fixed at around 50 percent for both internal and external business.

Looking ahead, we expect considerable market volatility and disruption as a result of the IMO 2020 rule change, and we will maintain an agile strategy to respond to fast-changing dynamics. We believe the fundamentals of the wet freight market are now stronger than they have been for many years, with more crude oil being seaborne, very limited supply growth in the next 18-24 months and an ageing crude tanker fleet in which more than 20 percent is more than 15 years old. We have subsequently positioned ourselves to benefit from these conditions. We have an increased focus on managing CO2 emissions on both time-chartered tonnage as well as third-party ships fixed and we continue to be engaged in industry efforts to address climate change.

The dry freight market was extremely volatile through our 2019 fiscal year as a result of political, environmental and regulatory influences. On the political front, the ongoing trade conflict between the US and China meant a dramatic change in the flow of soya beans to China which was further exacerbated by the African swine flu epidemic. In January 2019, the tragic accident at Vale’s Brumadinho mine in Brazil severely impacted iron ore flow and in the lead up to the IMO 2020 fuel change, we have seen the supply of vessels able to carry cargo reduced through vessels being in dry dock for extended periods fitting exhaust fume scrubbers. The Brumadinho disaster had the biggest effect on the market as we saw Brazilian ore exports reduced in April to 17.6 million tonnes, their lowest monthly level in more than 10 years, before soaring back to a record 37.8 million tonnes in August. In the same period, the average Cape earnings, as assessed by the Baltic Exchange, ranged from a low of USD3,640 per day to a high of USD38,014 – a price move not seen for over a decade.

It was a very profitable year for the Trafigura Dry Freight desk, which grew cargo volume handled by five percent to 42 million tonnes and notched-up improved margin on the basis of taking some contrarian positions in the market. Our operations continued to focus principally on Capesize vessels carrying iron ore from Brazil to Asia and Supramax trading between the Pacific Coast of Latin America and various ports in Asia. This year, however, we also broadened our scope to include a dedicated Panamax trading desk to expand our operations around internal coal flows, especially in the Atlantic market.

In the last quarter of our financial year, we have seen major disruption in the market as ship owners prepare for the IMO 2020 rule change capping sulphur emissions, creating considerable uncertainty around pricing and sourcing of bunker fuel. We have already seen major price fluctuations, with traditionally efficient bunkering ports seemingly unprepared for the switch in fuel grades. Looking ahead, we expect this trend to continue, with IMO 2020 generating both margin opportunities and heightened risks. Our focus will be on maintaining our adaptable position amid the predicted market disorder, so that we can fully meet our commercial obligations.

¹ Approximately 70% of our cargo programme is on external ships

²A vessel on hire for more than three months (excludes gas carriers)