LNG shipping at the bottom of the cycle

Chief correspondent Jason Jiang looks at the gas trades and ponders when prospects will improve.

The outbreak of coronavirus has shattered optimistic prospects for the LNG shipping market with the development of major gas projects thrown into doubt. However, analysts still hold a positive view on the medium to long term outlook of the market as demand is expected to pick up among developing countries in particular.

Wood Mackenzie estimates global LNG demand will grow 21m tonnes or 6% this year, slower than the 26m tonnes or 7% it anticipated earlier this year prior to the global spread of Covid-19. The consultancy believes the longer-term outlook for LNG demand remains favourable with demand growth of 92m tonnes estimated over the 2019-2025 timeframe.

Research by Poten & Partners shows that the LNG carrier orderbook stands at 118 vessels as of May, representing 22% of the current global on-the-water LNG carrier fleet and 74 vessels of the newbuildings have multi-year charters. 22% as a newbuild to fleet ratio is among the highest of any shipping segment and the fact that around 40% of the ships to deliver were ordered without charter contracts in place is a concern, and something that would have been unthinkable a decade ago.

The good news however with this tonnage overhang is that new orders are definitely slowing up.

“The pace of newbuild ordering has slowed significantly relative to 2018-19, with only four newbuildings ordered so far in 2020 and all of them ordered against multi-year contracts, an encouraging development for the future supply and demand balance of LNG carriers,” Poten stated.

Nevertheless, big names from Qatar and Russia have been busy reserving dock space at Asian yards in the past month for orders that will flow in shortly.

Olivia Watkins, head cargo analyst at VesselsValue, has seen a sharp decline of LNG time charter rates from around the $80,000 a day mark to around a severely loss-making $16,000 a day today.

“We are already hearing of some LNG cargoes for loading in June being cancelled due to weak market fundamentals. LNG marketers, such as Cheniere, may choose to remarket the cancelled LNG cargoes, however, the low prices may also put them off from doing so. If cargoes continue to be cancelled, demand stays low or earnings continue circulating at their current low figures, we could see some facilities being underutilised or even being shut off. On the other hand, this may help spot earnings and LNG prices short term with supply and demand balancing out,” says Watkins.

Cleaves Securities, meanwhile, reckons spot rates are now close to the bottom. The key question for Cleaves is how long this trough will last.

“We are not optimistic for the near- nor medium-term outlook for LNG carrier earnings,” Cleaves stated in a recent report.

Aman Sud, lead gas shipping analyst at Drewry Maritime Research, says the LNG shipping market has little chance of a significant improvement before the third quarter of this year, and LNG demand from primary importer China has taken a big hit which has weakened the prospects for a recovery.

“LNG prices and the impact of Covid-19 on LNG demand have led developers to re-evaluate their strategies regarding projects, which mean delays in reaching FID and commencement of operations,” Sud says.

According to Sud, major impacted projects include the Rovuma LNG project (15.2m tonnes per annum) in Mozambique, Qatar’s North Field Expansion project (33m tonnes per annum) and three export projects in the US: Driftwood LNG (27.6m tonnes per annum); Rio Grande LNG (27m tonnes per annum); and Lake Charles (16.5m tonnes per annum).

Sud reckons the delay in these mega-LNG projects and limited liquefaction capacity additions are bound to have a ripple effect on the LNG shipping sector.

“Lower capacity addition will eradicate the possibility of excessive supply and will support LNG prices. The additional vessels required to 2024 to transport LNG will be reduced by about 40%, from 270 to 160. We also expect slippages to increase during the period, coinciding with the delays in the under-development of projects. This would translate into lower orders for LNG vessels in the next three years. Project-based orders will decline, and speculative orders are expected to dry up, squeezing fleet growth,” Sud says.

According to Pablo Achurra, LNG/LPG shipping analyst at Maritime Strategies International, a rapid growth in the LNG trades was anticipated prior to the Covid-19 pandemic as US exports ramped up, and a large number of new liquefaction projects were expected to hit the market by 2024/2025, however these expectations have been shattered by the demand shock caused by the lockdown measures seen in the first half of this year, which exacerbated the LNG oversupply leading to a rapid fall in gas prices and vessel earnings.

“The weak demand environment and gas glut are expected to continue for the remainder of 2020 at least. Of course, a demand recovery is expected once the pandemic is controlled, but long-term damage may already be done as FIDs on new facilities are postponed or withdrawn in the interim,” says Achurra, adding that US projects are likely to be most affected with no new liquefaction projects expected to reach FID in 2020 while projects in other parts of the world are also likely to be cancelled and even those with state backing are expected to be delayed due to the current market conditions.

In spite of the short-term supply and demand shocks, Achurra reckons growth in LNG trade will still be significant in the medium to long term and he predicts trade to recover post-2021 with ample export capacity in Australia, the US and Russia, and China is expected to become the largest LNG importer by 2023, surpassing Japan, and similarly Europe and South Asia remain as key bright spots for future demand, with imports projected to see substantive growth.

“With the medium to long term still looking bright, the challenge for shipowners is to ride out the current storm,” Achurra concludes.

Jason Jiang

Jason is one of the most prolific writers on the diverse China shipping & logistics industry and his access to the major maritime players with business in China has proved an invaluable source of exclusives. Having been working at Asia Shipping Media since inception, Jason is the chief correspondent of Splash and associate editor of Maritime CEO magazine. Previously he had written for a host of titles including Supply Chain Asia, Cargo Facts and Air Cargo Week.
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