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Demand firm for gas shipping
SO FAR SO GOOD
LPG MARKET • GAS TANKER OPERATORS HAVE DONE REASONABLY WELL SO FAR THIS YEAR BUT WILL THE RELATIVELY SMALL ORDERBOOK CONTINUE TO PROTECT THEM IN A TIME OF UNCERTAINTY?
AFTER A BARNSTORMING first quarter, when freight rates for LPG tankers across the board rose to new highs, the second quarter felt the inevitable hangover. As in other sectors, a combination of volatile and unfriendly oil and gas prices, together with a slump in end-user demand in some markets, caused a fall-off in earnings, though many half-year reports released recently show that owners are still doing pretty well. Indeed, things seem to be on an upturn since the end of the quarter, with industrial recovery in Asia and a change in price differentials once more supporting rates in all sectors.
According to data provided by BW LPG, relying on figures from IHS, total seaborne trade in LPG in the second quarter was 9 per cent below year-earlier levels, largely as a result of lower Middle East exports following oil production cutbacks designed to support crude prices. LPG exports from the Middle East were 8 per cent down on the previous year at 8.8m tonnes, while exports from North America rose by 4 per cent to 10.9m tonnes – and exports using very large gas carriers (VLGCs) were up by 7 per cent.
Second quarter imports of LPG into China fell by 6 per cent compared to 2019 to 5.1m tonnes; BW LPG says retail demand has been recovering but low naphtha prices in particular have reduced demand for steam crackers. European LPG imports fell sharply, dropping by 41 per cent to 2.1m tonnes, partly once again as a result of adverse naphtha/ LPG price differentials but also because of a fall in the use of LPG as a road fuel as consumers were in lockdown. Conversely, Indian LPG imports were up by 16 per cent at 3.7m tonnes, primarily as a result of higher retail demand, especially for domestic cooking during the lockdown, and Japanese imports were also well up on the prior year.
DEMAND PATTERNS In the short term, BW LPG expects to see US LPG production remaining high, although further out this could be reduced if oil prices stay low, discouraging further shale oil and gas development. There are signs that LPG production in the Middle East is picking up again as oil output improves. It also expects to see a recovery in LPG demand in the petrochemical sectors in Asia and Europe as prices rebalance, along with incremental demand in China to feed new steam cracking and propane dehydrogenation (PDH) plants.
For the year as a whole, Drewry Shipping Consultants is now predicting total seaborne LPG trade of 107.3m tonnes, down from its forecast of 108.2m tonnes released in February, although both are above the 106.5m
GAS SHIP OWNERS HAVE BEEN AT THE FOREFRONT
tonnes recorded in 2019; similarly, its forecast of annual tonne-mile demand growth has been downgraded from 4.5 per cent to 0.8 per cent. Epic Gas, which specialises in the fully pressurised (FP) sector, considers that the continued restriction on Middle East exports and the availability of replacement tonnes from the US mean that there is a case for higher growth in tonne-mile demand.
A similar pattern has been seen in the seaborne trade in olefins, with ethylene shipments responding to Covid-19 lockdowns in Asia and the general slowing in the global economy. However, Navigator Gas reports that demand picked up late in the second quarter and, with new US export capacity coming onstream – not least from the terminal in Houston developed by Navigator in a joint venture with Enterprise Products Partners – there was an increase in liftings from late May onwards. Navigator reports that this trend continued into the third quarter as arbitrage opportunities remained open.
Pricing developments also boosted propylene movements into Asia throughout the second quarter, both from US Gulf terminals and from the Middle East. Petrochemical producers in Europe were also continuing to use naphtha as feedstock, which resulted in surplus output of butadiene; these volumes were also shipped to Asia in Handysize semi-refrigerated ships, further adding to tonne-mile demand for this sector.
The ammonia business suffered a shock at the start of the Covid-19 lockdown, which impacted short-term demand for fertilisers but, by mid-year, more medium-sized carriers found employment in the ammonia trades, although Exmar expects the recovery to be sluggish.
SUPPLY SIDE FACTORS One salient feature of the LPG tanker market in recent years, particularly among the smaller vessel segments, has been the comparative lack of newbuilding activity and new contracting. The relatively small orderbook is expected to support freight rates, as vessel supply is likely to be tight for the next few years.
For instance, Epic Gas note that, in the FP sector (over 3,000 m³ and excluding Chinese domestic vessels) there were at mid-2020 a total of 336 vessels in the water and only 17 – or 5 per cent – on order for delivery by end-2022. At the same time, there were 22 such ships of 28 years or more, seen as candidates for scrapping, not least with the high cost of retrofitting ballast water treatment plants and scrubbers (or running on higher cost ultra-low sulphur fuel oil). During the first half of 2020, one 5,000-m³ FP newbuilding was delivered and none were scrapped, though it must be stressed that the demolition market in south Asia was very weak due to restrictions on working practices resulting from the Covid-19 crisis.
Exmar does not share the optimism shown by Epic Gas. Exmar notes that timecharter equivalent (TCE) earnings for its 5,000-m³ pressurised ships were 9 per cent lower in the first half of 2020 than in the same period a year earlier, with TCE earnings for smaller ships down 21 per cent at $6,024/day. Exmar has responded by repositioning one vessel east of Suez to take advantage of better freight market conditions in Asia, but overall says that its management has reassessed the useful life of its fully pressurised fleet and reduced it from 30 years to 20 years, leading to an additional depreciation charge in its first-half figures.
If Exmar’s perception is shared, that could accelerate the pace of demolition among the smaller vessel segments, particularly with the necessary cost of upgrading older ships to meet recent regulations on ballast water treatment and sulphur oxide emissions.
HIGHER UP THE SCALE In the smaller semi-refrigerated market of ships under 13,000 m³, which can compete with FP ships, there were 199 vessels in the water and just three due for delivery in 2020 and 2022. The Handysize sector of semirefrigerated and small fully refrigerated segment consists of 121 ships in the water and only 4 on order.
In the midsize sector, which comprises smaller fully refrigerated gas carriers and where Exmar is the dominant operator, market sentiment has remained strong with limited idle time as a result once more of marginal fleet expansion. Some cargoes were taken over from the larger semi-refrigerated segment and, in parallel with the rising VLGC market, growing LPG supply supported improved rates. Exmar has managed to increase its contract cover, despite some charterers asking for shorter periods due to the volatility and uncertainty generated by the Covid-19 pandemic.
The VLGC orderbook is still quite high, though the 33 newbuildings due to join the fleet in the period to the end of 2022 is still much lower than the 79 vessels that were delivered in 2015 and 2016. To that total »
A DIP IN LPG EXPORTS HIT THE LARGER VESSEL
must be added the 17 newbuildings that arrived in the first half of this year, and some owners are still showing interest in booking new orders. BW LPG notes that the current orderbook stands at 11 per cent of the existing fleet of 299 ships; however, it also says that 10 per cent of the current fleet will be more than 27 years old by the end of 2022, with demolition the likely future for them.
In addition, BW LPG says, during the second half of 2020 and throughout 2021, more than 40 per cent of the existing fleet is scheduled for special survey; some of these may be in extended drydock for scrubber retrofits or, the latest craze, the adaptation of their main engines to be able to burn LPG. As such, this programme will reduce fleet supply significantly and, BW LPG says, “should provide support for VLGC freight rates”.
MARKET OUTLOOK So what does all this mean for the market – and the rates that cargo interests will be expected to pay? The major shipowners in the LPG tanker market are of one mind: continuing appetite for LPG in Asia will place additional demands on LPG tanker capacity in all size segments, with the US likely to contribute the bulk of the incremental tonnage. Signs are good too from petrochemical gases, with more ethylene and ethane exports due to come out of the US. Some of this will LPG exports from the Middle East,” the company adds.
If, however, VLGCs find themselves looking for work elsewhere, the impact will undoubtedly be felt further down the size sectors, with the midsize segment clearly at risk, though here the very limited projected fleet growth should provide some protection against downside pressure. That is not the case with the larger semi-refrigerated sector, though here the consistent increase in the volume of petrochemical gas trade – not least on longhaul routes from the US to Asia – will continue to offer incremental employment that should support earnings for operators.
There does seem to be some disagreement about the likely future for the FP sector but it would appear that, if freight rates become too weak, demolition sales will increase, especially now that the yards and beaches are back open.
Much of the outlook, though, remains clouded by the Covid-19 pandemic. Any resurgence in the spread of the virus is likely to cause a recurrence of lockdown restrictions and their associated impact on end-user demand. While some sectors, particularly residential demand for LPG for heating and cooking, remain resilient, other large-scale end-user markets are more price-sensitive. It would be best to expect the unexpected and it is clear that all the major LPG tanker operators are keeping a close eye on developments in order to make sure they have the right vessels in the right place – which may be in drydock for upgrades or retrofits, if freight rates weaken too far.
The other major factor that will affect the gas tanker sector is international relations – not least the relationship between the US and China. Perhaps, in fact, the most important decision that will be made for the market over the second half of the year will be the US presidential election in November.
be carried on the new breed of very large ethane carriers (VLECs), with Chinese importer Zhejiang Satellite Petrochemical now having a total of twelve 98,000-m³ VLECs on order at Korean yards.
In the near term, BW LPG feels that low oil prices could weaken US LPG exports during 2021 and, with a relatively high number of new VLGCs due to be joining the fleet, this could put downward pressure on vessel utilisation. “The magnitude of the impact is sensitive to the development of oil prices, and freight rates could be supported by a heavy drydock schedule and the expected recovery in
GROWTH IN NGL PRODUCTION IN THE US IS
