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Large carriers lead global LPG trade surge

Tue 01 Aug 2017 by Mike Corkhill

Large carriers lead global LPG trade surge

The global LPG carrier fleet welcomed 92 new ships of all sizes and aggregating 4.8M m3 in 2016, boosting overall cargo-carrying capacity by 18%. It was the largest ever annual expansion of the LPG fleet.

These ships transported 90.7 million tonnes (mt) of LPG worldwide last year, a year-on-year rise of 6%. The main drivers of the LPG trade surge are rapidly expanding US export volumes, due to the successful fracking of shale gas and oil, and rising imports by Asian nations, most notably China, India and Korea.

VLGC workhorses

The VLGC is the fleet workhorse that makes the international transport of large LPG volumes economically attractive. These fully refrigerated ships are the largest LPG carriers afloat, of 70-85,000m3 in capacity and can carry consignments of up to 48,000 tonnes on their deepsea voyages.

Fleet data maintained by VesselsValue shows that as of July 2017 there were 252 VLGCs in service and 30 on order. VLGCs account for 64% of the LPG fleet’s cargo-carrying capacity.

The VLGC fleet has grown rapidly over the past two years, in tandem with the global trade in LPG. In 2015, 35 VLGCs entered service while last year a record 44 were delivered, a 22% growth in fleet capacity. 

In the first five months of this year, seven additional VLGCs were completed, one was scrapped and there were no new orders. Another 19 are due to be delivered this year, while five VLGCs are set for completion in 2018, six in 2019 and two in 2020.

The delivery of 105 VLGCs between 2015 and 2017, boosting fleet numbers by 39%, is playing havoc with freight rates. The Baltic Exchange LPG index for the benchmark Ras Tanura–Chiba route showed spot market rates of US$29/tonne this spring, down from a peak of US$143/tonne in July 2014.

VLGC owners are suffering in the current freight market due to not only the high rate of newbuilding deliveries but also the relatively weak price of naphtha, an alternative petrochemical feedstock. Another negative factor is the firmness of US LPG prices; these have reduced the attractiveness of West–East arbitrage shipments.

Nevertheless, shipowners are confident of stronger freight returns, beginning in 2018, as the orderbook shrinks and US exports continue to rise. The VLGC fleet utilisation rate, at near 90%, is much better than a year ago despite the current desultory freight earnings.       

Reduced freight rates are also tempting charterers to make commitments. In India, for example, Indian Oil Corp, Hindustan Petroleum and Bharat Petroleum between them have recently booked 14 LPG ships, including nine VLGCs, for average charter periods of two years.

There is also interest in using VLGCs as floating storage vessels at strategic anchorages where they serve as mother ships, offloading to smaller vessels via ship-to-ship (STS) transfers for local distribution.

At any one time, there are 10-12 VLGCs utilised in this way worldwide. While most of the floating vessel charters are shorter term, say six months, to cover the drawdown of a few cargoes, some can be of several years, in which case the mother ship needs regular STS refills, usually from another VLGC. 

US export record

US Q1 2017 LPG exports, at just over 8 mt, were 28% ahead of the same quarter a year earlier. The growth rate marked a continuation of the country’s recent buoyant performance as an LPG producer and exporter.

In 2016 the US dispatched 25.4 mt to world markets, 25% up year-on-year and a new annual record. The US, which managed only 6 mt of exports as recently as 2012, is now the world’s largest LPG export nation by a wide margin.

Although the US export shipments’ growth rate will not be maintained at this high level for much longer, overseas sales will continue to grow in overall terms for the rest of this decade and into the next. US consignments should help the world VLGC fleet reach a supply/demand balance by H2 2018.

Most of the country’s LPG exports are loaded at terminals in Texas and sent westbound through the new, enlarged Panama Canal locks to customers in Asia. As of June 2017, after their first full year of operation, these locks had accommodated approximately 1,400 vessel transits, of which almost 30% were LPG carriers.

The inability of Middle East producers to significantly boost exports is supporting US sales to Asia. In 2016 the Middle East countries between them loaded 38.7 mt of LPG, primarily to VLGCs, a 9% year-on-year increase.

The region’s primary sellers are Qatar, Abu Dhabi and Saudi Arabia, each with annual LPG exports of approximately 10 mt. Raising volumes much above this level is hindered by the new petrochemical complexes coming onstream in the Middle East and the demand on domestically produced LPG as a feedstock in these plants.   

Asia receiving end

As a supply-led market, available LPG has not had much difficulty in finding a home historically. The populous nations of Asia have absorbed the growing LPG export volumes traded internationally in recent years, confirming the fundamental nature of the market.

China overtook Japan to become the largest LPG importer in 2015, and purchases have continued to climb. Some 16.1 mt of LPG were discharged at Chinese ports in 2016, a 37% jump on the previous year. Imports climbed a further 10% year-on-year during Q1 2017, driven by replenished stocks and the strong demand for petrochemical feedstock.

India’s Q1 2017 imports, at just over 3 mt, were 40% up year-on-year and above Japan’s quarterly levels for the first time. The performance puts the country on track to become the world’s second-largest buyer of LPG this year.

The Indian government’s encouragement of LPG use in rural households is supporting rising imports. Recent figures show that for FY ending March 2017 India imported 11 mt of LPG, 23% up year-on-year.

Indonesia is transitioning from a gas export to a gas import country, as domestic reserves dwindle and use of the fuel as a substitute for diesel is increasing. The ASEAN nation imported 4.4 mt of LPG in 2016 and is poised to join the Top 5 LPG importers club by the end of the year, at the expense of the Netherlands and not far behind South Korea. 

LPG wave carries the fleet

Seaborne movements of LPG are expected to grow by up to 10% in 2017, broadly in line with the expansion of the VLGC fleet and bringing global trade to near 100 mt per annum. Forecasts for global trade growth in 2018 are approximately 7%, over three times the rate at which the VLGC fleet is due to expand.

The separation of the trade and fleet growth curves will support climbing VLGC freight rates in 2018 while maintaining the high ship utilisation rates of around 90% now being enjoyed by this segment.
 

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