Chief correspondent Jason Jiang assesses where rates for LPG carriers are headed after a tough few months.
The LPG shipping market has taken a hit since the beginning of this year with freight rates falling substantially due to trade disruptions brought by the outbreak of the Covid-19 pandemic. Operators and analysts hold cautiously optimistic views that the market might pick up from next year.
According to data by Dorian LPG, global seaborne LPG volumes remained buoyant during the first quarter of 2020, totaling 26.9m tons, 3.5% above the same period in 2019. US seaborne LPG exports have driven global growth, as such exports have increased to record levels during the first calendar quarter, totaling 11m metric tons and representing 33.2% annual growth. Elevated US exports were balanced by slightly declining Middle Eastern export volumes. The Middle East exported 9.2m metric tons of LPG during the quarter, a 7.6% year-over-year decrease.
Randy Giveans, an equity researcher at Jefferies, believes global demand for underlying LPG commodities will remain weak while the US supply of propane and butane will contract in the coming quarters related to falling US domestic oil and gas production.
“Since LPG is a by-product of oil and gas production, decreasing OPEC production related to the new production cuts also negatively weighs on the space. However, the gradual lift of Covid-19 lockdown in China is resulting in acceleration of the PDH plants operations. Also, the Indian government recently announced new subsidies for LPG household use during the country’s lockdown, thus boosting LPG demand going forward. As a result, after bottoming during 2Q20, we expect the LPG shipping market to improve later this year,” Giveans says.
Martin Kjendlie, an analyst at Fearnleys, has seen the Baltic rate for the VLGC market drop heavily in the last few months with a 50% reduction from levels of $60 per metric ton seen only a few months ago to current levels of $30 per ton and he reckons much of the drop in rates is caused by a current narrow arbitrage which leads the market to expect more cancellations and fewer cargoes for the increasing list of ships coming open, something likely to happen very soon.
Kjendlie also notices a fear of fewer US cargoes on the back of reduced shale production due to the recent low oil-price climate, while the Middle East cut backs are not bringing incremental LPG barrels.
“We believe the next six months to depend on available volumes and the rebound of demand combined with the development of oil prices. For 2021 we believe the market equilibrium to strengthen again,” Kjendlie says.
Major LPG shipping operator BW LPG said in a recent report that near term VLGC rates are supported by the lagged effect of production changes, accumulated inventory and firming retail demand Asia while a weaker outlook for LPG supply coupled with a high orderbook is expected to put downward pressure on the vessel utilisation in the medium term, however recovery to a higher oil price environment may affect the outlook positively.
“There is a possibility that VLGC earnings may decline further in the coming weeks because of lengthy open positions and many re-lets amid expected lower exports from key exporting regions. Although there has been a premium for VLGCs trading in the West compared to the East markets, unworkable arbitrage most likely is expected to wipe out the premium levels,” says Shantanu Bhushan, LPG consultant at Poten & Partners.
Poten expects less than 1% increase in seaborne supply of LPG in 2020 and expects it to remain almost at the same level in 2021, in view of declining production and exports from the US, while no upside in expected from the Middle East.
“As for vessel supply, nine VLGCs are expected to be delivered during rest of 2020 and a further 16 in 2021. As such, freight rates are expected to remain under pressure. However, 80 VLGCs, that were delivered during 2015-16, will have surveys due during 2020-21. Additionally, around 20 VLGCs are expected to undergo retrofitting works for IMO 2020 compliance sometime later this year. Although not all these vessels are expected to be taken off from active trading simultaneously, it can help balance tonnage supply in short bursts,” Bhushan adds.
For the period beyond 2021, Poten believes when US crude production commence rebounding, LPG will start flowing as well, leading to higher seaborne LPG supply supporting VLGC demand and therefore freight rates.
Aman Sud, lead gas shipping analyst at Drewry, reckons the LPG shipping sector has fared better than its counterparts as the outbreak of coronavirus continues to affect energy demand.
“We still retain our positive outlook for the LPG shipping sector between 2020 and 2024, supported by robust annual growth of 3% in the LPG trade during the period. The fleet expansion will be limited at 2% annually during the forecast period on the back of a balanced orderbook and high demolitions in smaller vessel segments,” Sud says.
Drewry reckons the easing in lockdown restrictions will boost global LPG demand. However, LPG demand from the petchem industry will suffer as petchem owners look to use cheaper naphtha as a feedstock instead of LPG.
“The current orderbook forms just 12% of the LPG fleet in terms of capacity, indicating higher deliveries in the next three years. We expect slippages to remain low, creating a short-term oversupply of vessels. However, LPG demand will recover from 2021 and a rise in LPG trade on the US-Asia route will absorb vessels in the forecast period. New orders will remain low in 2020-21 due to the pandemic and as several vessels are already on the orderbook. Furthermore, orders for LPG-fuelled vessels will increase due to the IMO 2020 regulations,” Sud concludes.