Gas tankers respond to pricing

UP WITH DEMAND

GAS TANKERS • SHIPOWNERS IN THE LPG SECTOR HAVE FACED SOME SERIOUS CHALLENGES OVER THE PAST YEAR BUT SEEM TO HAVE COME THROUGH WITHOUT TOO MUCH DIFFICULTY

SHIPPING FUNDAMENTALS are generally assessed on the basis of the balance between vessel supply and vessel demand. In the gas trades, certainly in the larger vessel segments, there is though another metric to be taken into account: the price of LPG in different parts of the world. For very large gas carriers (VLGCs), which in a normal market work exclusively in LPG, earnings over this year have reflected the generally tight arbitrage between domestic US prices and those available in the major importing countries in Asia.

LENGTHENING WAITING TIMES FOR PANAMA

CANAL TRANSITS ARE HELPING REDUCE EFFECTIVE

VESSEL SUPPLY AND SUPPORT FREIGHT RATES

High LPG prices in the US reduce the availability of export volumes and also reduce end-user demand, particularly in the petrochemical sector, depending on the competitive position compared to naphtha prices, and in the propane dehydrogenation (PDH) market, a significant draw for propane imports into China in particular, where margins are currently very tight.

These factors tend to unwind but it takes time. High prices in the US are prompting investment in well completion, bringing more NGL volumes into the market and adding to inventories, though these are currently still below the five-year rolling average. That had a noticeable effect during the third quarter, with North American LPG exports up by 16 per cent compared to the same period in 2020.

The other issue facing the global LPG trades over the past year has been the output curbs introduced by the Opec+ nations, primarily to support global crude oil prices. That has meant less associated gas and lower LPG availabilities. That situation does seem to be easing somewhat, although Saudi Arabian LPG exports were also constrained in July due to production issues relating to power outages. On the other hand, Iranian exports have recovered, rising more than 90 per cent year-on-year in the third quarter, with most of that heading, not surprisingly, for China.

FEEL IT IN THE POCKET Overall, in fact, the third quarter was a decent one for the major VLGC owners. BW LPG recorded timecharter equivalent income of $104.8m, up from $101.5m in the same period in 2020, with a more even balance between timecharter and spot earnings. EBITDA slipped slightly to $64.5m, though operating profit improved from $32.5m to $39.2m, largely as a result of one-off gains.

Dorian LPG posted revenues of $63.1m for its second fiscal quarter to end September, up from $54.7 a year earlier, with operating income well ahead of 2020 levels at $19.1m and net income rising from $0.54m in the same period 2020 to $14.1m. Avance Gas

saw revenues slip slightly, from $48.7m in the second quarter to $47.4m, though lower depreciation and amortisation helped operating profit improve from $5.75m to $8.08m and net profit rose from $1.47m to $4.22m.

Fourth quarter results are likely to show an even brighter picture. Since the end of September, VLGC rates have continued to rise, with timecharter equivalent rates hitting year-high figures of more than $40,000/day by late November. More is expected in 2022, with BW LPG saying it expects US LPG inventories to be back towards average levels by the second half of the year and the still-strong oil price supporting further production growth as well, potentially, more output from Opec+ producers.

At the same time, demand remains strong and is likely to continue to rise. There is further growth expected from the retail sector, especially in emerging economies and, while price will remain an issue, the addition of new petrochemical capacity during 2022/23 should also offer additional LPG remand. More particularly, there are several new PDH plants due onstream in China between now and 2025, which will pull in a significant volume of new propane imports. Avance Gas calculates that six new facilities scheduled to be commissioned by the end of 2023 will add more than 5.0 mta to import demand.

SUPPLY-SIDE WORRIES The cloud hanging over the VLGC sector is the current very high orderbook, which stands at some 24 per cent of the existing fleet, according to BW LPG, with a heavy delivery schedule through to 2024. Indeed, compared to a global VLGC fleet of 323 vessels at end-2021, 69 newbuildings are due to arrive by the end of 2024, with 42 of those scheduled for 2023 alone. Absent further contracting and any additional demolition activity, that points to a fleet of 380 VLGCs by the end of 2024.

However, there will be some candidates for demolition emerging in the coming few years, partly due to the age profile of the fleet – 10 per cent of which is now older than 25 years – but also as a result of increasingly strict emissions controls. Retrofitting VLGCs to meet those standards will be an expensive business and owners of older ships may well feel that is not financially viable. Even if they continue trading, operators may have to reduce sailing speeds to achieve emissions targets, effectively reducing carrying capacity.

Another factor impacting the availability of VLGC capacity at present is the level of delays for transit through the Panama Canal, where LPG carriers account for some 23 per cent of transits. By the fourth quarter, waiting times for gas ships had risen to around two weeks, with the Canal prioritising LNG carriers, containerships and passenger vessels; VLGCs are currently not able to book slots more than 14 days in advance and the new locks installed in the Canal are restricting its capacity.

As most of the growth in LPG demand is expected to be found in Asia, US exports will mostly be routed via the Panama Canal so continued delays will have the effect of taking capacity out of the market, though it may also make Middle East exports look more attractive – as well as those stemming from export facilities on Canada’s Pacific coast.

AT THE SMALLER END Matters are different in the smaller gas tanker segments, although these too have benefitted to some extent from rising LPG exports from the US, with BW Epic Kosan (BWEK), the largest player in the sector, noting continued strong demand for services within the Americas but also this year to Africa – and even occasional long-haul voyages to Asia.

But the fully pressurised and semirefrigerated LPG tanker sectors also work heavily in petrochemical gases, which VLGCs cannot handle, and these trades have been adversely affected by the Covid pandemic, which has reduced demand in Asian markets. As a result, BWEK notes, all of the smaller LPG tanker sectors are still recovering from long-term market lows and, for the third

BW LPG HAS BEEN BUSY RETROFITTING EXISTING SHIPS

WITH DUAL-FUEL ENGINES TO RUN ON LPG, HELPING

quarter 2021, remained below the long-term average.

For instance, BWEK’s own timecharter equivalent earnings, on a per-ship, per-day basis, came in at $11,346 for the third quarter as a whole and, while this was 5 per cent up year-on-year, it was still below the long-term market average of $12,100.

But the market does appear to be showing some recovery and BWEK says there is further upside ahead. One thing that marks the smaller sectors out from their VLGC cousins is the relative lack of any significant newbuilding activity, with the current orderbook for fully pressurised ships standing at 4.7 per cent of the existing fleet and for smaller (up to 13,000 m3) semi-refrigerated ships at just 2.1 per cent. That indicates an overall fleet growth of less than 1 per cent per year out to 2024, not taking account of the fact that the number of small gas ships aged 30 years or more exceeds the number of scheduled newbuilding deliveries.

It is difficult to draw any conclusions from BWEK’s third quarter results, as the company was only formed earlier this year through the merger of Epic Gas and Lauritzen Kosan and the fleet size and cost base has changed considerably compared to a year ago. Nevertheless, it is noticeable that timecharter equivalent earnings were higher than in the second quarter of the year, although like many ship operators in all sectors of the business, operating costs also increased, largely as a result of the difficulties posed as a result of the Covid pandemic in terms of crew changes and the delivery of spare parts.

Those difficulties look likely to remain in the near term, along with inflationary pressures in various sectors. However, BWEK says, looking ahead, recovery is already evident. Much of that reflects the imbalance between the modest fleet growth, expected to be some 0.7 per cent this year, and overall demand, where global LPG seaborne trade is expected to end the year 5.2 per cent up on 2020.

A VERY SMALL ORDERBOOK IS HELPING TO SUPPORT

EARNINGS IN THE FULLY PRESSURISED AND SMALLER VARIED FLEET In the mid-size sector, the story of the last year has been on of stability, according to Belgium-based Exmar, with rates remaining at “sustainable” levels. It believes there are reasons to suggest that the sector will remain in a positive sentiment through to the end of 2021 at least, especially as a result of the exceptionally strong energy market. During the third quarter it secured timecharter employment in the range of $750,000 to $800,000 per calendar month, with timecharter cover already at 66 per cent for 2022.

Timecharter equivalent rates for mediumsized LPG tankers stood at $23,026 per day at the end of the third quarter, up from $21,412 per day a year earlier. Indeed, according to Exmar’s figures, this was the best performing LPG tanker sector, as only very small pressurised tankers also managed to see any increase, that on the back of improved refinery activity. By contrast, VLGC rates were down almost 10 per cent on the year and, although they had stabilised, they were at “somewhat disappointing levels”, Exmar says, primarily as a result of low US LPG inventories and the subsequent “challenging arbitrage pricing” for US Gulf loadings. Indeed, timecharter rates were very similar to those for mid-sized vessels of half their capacity.

Exmar posted third-quarter operating profit of $4.4m for its shipping activities (including LNG), well up on the $3.6m recorded a year earlier. That figure was boosted by the arrival of its first dual-fuel VLGC Flanders Innovation, which went on a long-term charter to Equinor in August, as well as rising earnings from the mid-size segment. A sister vessel, Flanders Pioneer, arrived in September and will have an impact on Exmar’s fourth quarter results.

As this issue of HCB went to press, Navigator Gas had not yet released its third quarter results, which should give a clear indication of the trajectory of the Handysize LPG tanker segment; those results will be reported in HCB’s weekly newsletter once they are published.