BW’s view on the LPG trades

WHERE TO NEXT?

ANALYSIS • CURRENT WEAKNESS IN THE VLGC MARKET SHOULD NOT LAST TOO MUCH LONGER, GIVEN CONTINUED STRENGTH IN LPG DEMAND GROWTH IN CHINA AND INDIA

THE LPG TANKER business has been through a massive period of change over the past ten years. Continued industrialisation in China and rising affluence in India have sucked in increasing volumes of LPG, with the new production and export streams fed by North American shale gas picking up a lot of this new demand.

Prospects of continued growth led many in the LPG tanker business to invest in new tonnage, particularly when very large gas carriers (VLGCs) were earning rates at the very top of the market. However, the arrival of all that new carrying capacity has since then tipped the market into a correspondingly deep slump.

The question now being asked is this: when will the next upturn come? What can tanker owners and their investors expect of the LPG business in the near to medium term?

Those questions were answered to some extent by Martin Ackermann, CEO of BW LPG, at the 30th World LPG Forum this past October. As boss of one of the largest and most long-established VLGC operators in the world, he is well placed to comment and his figures revealed some pertinent insights.

TRADING IN LPG Between 2011 and 2016, global LPG trade grew at an average annual rate of 9 per cent, rising from under 60 m tonnes (mt) in 2011 to more than 90 mt last year; 2017 is expected to see liftings close to 93 mt, though the pace of growth has slowed since 2015.

Over the same period, exports from the Middle East have grown at an average annual rate of around 3 per cent, while US exports have witnessed an astonishing annual growth of some 50 per cent. In 2011, Middle East exports amounted to close to 35 mt, while those from the US were just 3.3 mt; US exports this year are projected to be around 30 mt, only just shy of the 36.6 mt expected to be lifted from the Middle East.

Those numbers make it clear that the US is currently meeting almost all the incremental demand for LPG. This is good news for LPG tanker operators, as US exports to Asia generate higher tonne-mile demand than those from the Middle East. That 50 per cent annualised growth in US export volumes over the past six years translated into a 78 per cent annualised growth in tonne-mile demand.

However, while around 50 per cent of US exports in 2017 have headed to Asia, most of this volume is now going via the Panama Canal, following the enlargement of the Canal’s locks. That has had a negative effect on tonne-mile demand compared to the Cape route that accounted for most »

of the US exports to Asia up to 2016. The switch to the shorter route did, though, make it more viable to trade US LPG to Asia at a time when arbitrage was being squeezed.

During the first half of 2017, Ackermann noted, the US accounted for 32 per cent of global LPG seaborne exports, with the Middle East still ahead at 40 per cent. The North Sea is comparatively stable, generating 10 per cent of global trade, while the Mediterranean’s share has slipped to 8 per cent. While US LPG production has been rising, domestic demand has been virtually flat since 2013, leaving more product available for export. Those trends are expected to continue in the near term, although the pace of output growth is forecast to slow in 2018.

Another salient factor in the US LPG market this year has been that flatter production growth, combined with falling stock levels as a result of increased export volumes, has pushed up domestic prices to historic levels. As a consequence, the Far East-US propane price spread has been tight throughout 2017, offering a margin for freight that is well below breakeven costs for LPG tanker owners.

WHERE’S THE DEMAND? As indicated earlier, much of the increasing demand that is driving this expansion in trade volumes is coming from China and India. China’s imports in the first half of 2017 amounted to 9.04 mt, 16 per cent up on the year earlier. Increasing use of propane dehydrogenation (PDH) in the production of propylene lies behind much of this rise: China now has some 4.6m tpa PDH capacity, due to rise to 6.2m tpa next year after another two plants come onstream.

That pace of growth is being supported by price movements, Ackermann illustrated. Propane and propylene prices diverged during 2016 and are expected to continue to do so into 2018 and perhaps beyond; this makes PDH output economic even when delivered LPG prices are high.

India’s imports of LPG in the first half of 2017 amounted to 5.38 mt, 15 per cent higher than a year earlier. In contrast to China, India’s rising consumption derives largely from more widespread use of LPG in households; the government has pledged to provide 50 million new LPG connections to poor families by the end of 2018, of which 16 million had been put in place by the end of 2016. Ackermann noted that the Indian government is currently talking about expanding this target to 100 million homes by 2020.

At present, retail demand for LPG accounts for around 90 per cent of total Indian consumption and Ackermann believes there is strong upside potential as current per capita consumption remains well below the global average. If that upside is realised, he said, India could need to import a further 9.3m tpa.

By contrast with China and India, imports into the mature markets in Asia is essentially flat. South Korea imported 3.24 mt in the first half of 2017, compared to 3.20 mt in the first half of 2016, despite an increase in import volumes in the first quarter of 2017 driven by inventory restocking. Similarly, Japanese imports in the first half of this year amounted to 5.79 mt, only 2.5 per cent higher than a year earlier.

BACK TO BALANCE The final part of Ackermann’s presentation looked at the development of the VLGC fleet. Remarkably, the size of the fleet is projected to almost double between 2011 and 2020, rising from 140 ships to 278. Fleet expansion was particularly rapid in 2015 and 2016, averaging 21 per cent growth in those two years, although the pace of new deliveries has tailed off since then. Barring any new contracting, construction will fall yet further out to 2020 – although Vitol has recently declared two options for 2019 delivery, so the picture is not clear cut.

There was no scrapping of VLGCs between 2012 and 2015 and not a lot since then. LPG carriers can trade for a long time – 25 years tends to be looked on as a minimum rather than a target – and there are currently not a lot of potential candidates for demolition.

Nevertheless, Ackermann said, with fleet growth likely to be limited over the near term, the VLGC supply/demand balance should come back into equilibrium in 2018, which will help freight rates recover. HCB

GROWTH IN GLOBAL SEABORNE LPG TRADE IS BEING

DRIVEN IN NO SMALL PART BY NEW PDH CAPACITY IN

CHINA (PREVIOUS PAGE) AND NEW US PRODUCTION AND