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READY FOR ANYTHING FLEETS • GAS SHIP OWNERS HAVE BEEN ENJOYING SOME GOOD TIMES OF LATE BUT THE COVID-19 CRISIS WILL IMPACT MANY. THEY ARE, THOUGH, WELL PREPARED FOR THE FUTURE FOR SOME YEARS now, careful planning of fleet expansion and replacement on the part of the major LPG tanker operators, together with consistent growth in global maritime trade in LPG and other gases, has delivered a generally calm market with – relatively – decent returns for investors. During 2019, the arrival of new export streams – mostly, but not all, from North America – together with continued demand growth in Asia produced a firm market, particularly in the larger size segments of the gas tanker fleet. But, like all shipping sectors, LPG tankers had to face the arrival of the ‘IMO 2020’ rule on sulphur emissions, with the choice to either burn low-sulphur bunker fuel or to install exhaust gas scrubbers. It is interesting to see that the larger owners of very large gas carriers (VLGCs) have taken different approaches: BW LPG has invested in dual-fuel
engines, both on its newbuildings and, progressively, as retrofits to its existing ships; Avance Gas, on the other hand, has chosen to take advantage of scheduled drydockings for special surveys to install scrubber units. Neither option is cheap, and having ships out of service for longer than planned during a period of firm freight rates adds a further cost. But, by and large, owners appear to have navigated what seemed to portend a difficult time without too much disruption. As 2020 began, gas tanker operators were reaping the rewards of their careful management of the global fleet, with firm earnings across the board but not least in the VLGC sector, where timecharter equivalent earnings were nearly three times what they had been just a year earlier. But things were about to change, and change drastically. The emergence of the Covid-19 epidemic in China
immediately cut into demand for LPG and other gases and this was followed swiftly by the collapse in the global oil market, already over-supplied as a result of the emergence of shale oil and gas from North America but also by the fight for market share between other major producers. Added to that, the rapid spread of the Covid-19 virus around the world and the resulting lockdowns and restrictions on movement prompted further reductions in demand for all oil and gas products. PLAY WITH THE BIG BOYS BW LPG is the largest player in the VLGC sector, with a fleet of 47 vessels out of a total 294 operating ships. It notes that, up to the end of April, 12 newbuildings joined the fleet and another nine are due by the end of the year, although work restrictions at shipyards as a result of Covid-19 may delay some of them. Avance Gas, another significant presence in the sector, says that the current orderbook is equivalent to 11 per cent of the existing fleet, with 23 further ships under construction for delivery in 2021 and 2022. Avance also says that there are 27 existing VLGCs that are already 25 years of age or older; these must be considered likely candidates for demolition. However, at present the demolition market is almost non-existent, with work restrictions in place in south Asia not only removing much of the potential for demolition sales but also sharply reducing the demand for scrap steel, with a consequent impact on scrap values for old ships. Nonetheless, keeping old vessels working when there are not only IMO 2020 provisions to meet but also the requirement to manage ballast water properly means it is an expensive business. In the short term, BW LPG believes that freight rates will be supported by production changes, the winding down of high inventories in the US and firming retail demand in Asia as Covid-19 lockdown measures are eased. Looking slightly further ahead, however, the collapse in oil prices means that production is likely to be curtailed, with a knock-on effect on the availability of export LPG volumes in the US and Middle East, while the low price of naphtha in the current market means it
HCB MONTHLY | JUNE 2020
