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LPG trade boom supports freight uptick
GASPING FOR GAS
GAS • THIS YEAR’S RISING LPG TANKER MARKET LOOKS SET TO CONTINUE, WITH CONFIDENT EXPECTATIONS OF FURTHER GROWTH IN LONG-HAUL GAS TRADES
WIDENING PRICE DIFFERENTIALS, the opening of new export terminals and continued appetite for LPG imports across Asia have contributed this year to a significant increase in freight rates for LPG tankers in most size ranges but most notably among very large gas carriers (VLGCs). Market analysis reported by VLGC owners suggests that there is more to come, with projected fleet growth likely to be outstripped by rising demand, at least in the near term.
LPG exports in VLGCs from the US amounted to 8.5m tonnes in the third quarter of 2019, up from 7.0m tonnes in the same period a year earlier. That equates to 59 cargoes per month for the latest period, compared to 51 per month in first quarter 2019, with much of the increase resulting from the opening of the Marine East II pipeline to Marcus Hook on the east coast, which has provided sufficient supplies for ten cargoes per month since March 2019. VLGC operator Dorian LPG says that the US is currently exporting close to capacity.
It is not just the US that has been generating new demand for VLGCs. LPG exports from the Middle East rose from 7.9m tonnes in second quarter 2019 to 8.2m tonnes in the subsequent period, despite temporary disruptions caused by refinery and tanker attacks and lower Iranian exports. VLGC operator Avance Gas expects Middle East exports to be further constrained over the winter due to refinery maintenance outages and higher domestic consumption. This should result in additional tonne-mile demand for VLGCs, with some product moving into Asia – although not to China – from the US instead of the Middle East.
Further new export capacity has come onstream in Australia and Canada, where the new AltaGas facility in British Columbia opened earlier this year; these two sources were responsible for around 0.4m tonnes of new exports in the third quarter.
BURNING FOR PROPANE The third quarter of 2019 also witnessed the emergence of some significant new sources of demand. In China, Dongguan Grand Resource & Technology conducted trial production at its new 600,000-tpa propane dehydrogenation (PDH) plant and Hengli Petrochemical started up a new single-train PDH unit. SP Chemical brought a new steam cracker onstream, using both ethane and propane as feedstock. Given the current trade battle between the US and China, these new plants are currently using LPG sourced from the Middle East.
Meanwhile, in South Korea, both Hanwha Total and LG Chem brought steam crackers back online after maintenance, during which both were expanded and will be using more propane feedstock. Not only did all this activity increase demand for LPG, but during the third quarter the price spread between the US and Far East widened, allowing an increase in freight rates.
As a result of all this, according to Drewry Shipping Consultants, global seaborne LPG trade is expected to increase by 4.3 per cent to 103.5m tonnes, with 2020 likely to see a 4.7 per cent year-on-year increase to 108.4m tonnes. Epic Gas, leading operator in the fully pressurised segment, quotes Facts Global Energy (FGE), which is predicting that global LPG seaborne volumes will hit 124m tonnes by 2025, of which 64 per cent will be moving from the Americas to Asia. Import growth rates in India and South Korea are expected to average 8.0 and 5.0 per cent per year, respectively, although Chinese LPG imports are projected to grow by some 2.5 per cent annually, FGE says.
THE SUPPLY SIDE The shipping market has been further tightened in recent months by vessel supply disruptions, not least to cope with the need to retrofit exhaust scrubbers or prepare fuel tanks ahead of the arrival of the ‘IMO 2020’ emission rules on 1 January 2020. As an indication of the current situation, Avance Gas notes that its own fleet utilisation averaged 96.5 per cent during the third quarter
Avance Gas says the global VLGC fleet totalled 280 ships in October 2019, with another 37 on order, equating to 13.2 per cent of the active fleet. Of the newbuildings, three were due for delivery before the end of 2019 and another 21 are scheduled to be delivered over the course of 2020.
Among smaller LPG tankers, the orderbook is even tighter. Epic Gas says that there are only 17 fully pressurised tankers of 3,000 m³ or larger currently on order (excluding domestic Chinese ships), with a total capacity of 88,500 m³. That equates to just 5 per cent of existing capacity in the segment. Furthermore, there are 20 ships in the water that are 28 years of age or older, equivalent to 4.2 per cent of existing capacity, and are assumed to be candidates for imminent scrapping.
Epic Gas also looks at the smaller end of the semi-refrigerated segment, where there are only five ships currently due for delivery by the end of 2020; of these, two are ethylene ships purpose-built for that trade. Epic Gas expects
scrappage to exceed newbuilding activity in the near term, especially given the cost of meeting incoming legislation on ballast water treatment and emissions control. MORE TO COME It is widely expected that all those new ships due to join the fleet over the coming two years will find employment as a result of further increases in seaborne trade. In the US alone, Enterprise Products Partners is in the process of expanding export capacity at its complex in Houston, which may generate a further 23 VLGC cargoes per month by third quarter 2020; in addition, expansions by Targa Resources, Energy Transfer Partners and Phillips 66 will further boost potential exports.
Avance Gas also notes that US exports are now closing in on 50 per cent of domestic production, which is expected to put growing pressure on domestic LPG prices and may open up further volumes for export.
Although some tonnage will return to the market after work to prepare for IMO 2020, it is the case that some of the refinery outages that have affected vessel demand in recent months were also related to the need to optimise refinery output to meet the changing profile of bunker fuel demand; that too is expected to return to normal in the early months of 2020, presaging perhaps a calmer period for the gas tanker freight markets, albeit at levels higher than in previous years.
VLGC OWNERS ARE CURRENTLY REAPING THE BENEFITS
OF A RISING FREIGHT MARKET, AND ARE GENERALLY
CONFIDENT THAT THE SITUATION WILL LAST WELL INTO
