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LNG World Shipping

Healthy freight rates and 2018 LNG shipping predictions

Wed 03 Jan 2018 by Mike Corkhill

Healthy freight rates and 2018 LNG shipping predictions

Back in 1930 Albert Einstein announced “I never think of the future. It comes soon enough.” At around the same time another Nobel laureate in physics, Nils Bohr, famously said “Prediction is very difficult, especially if it’s about the future.”

While bearing in mind these pearls of wisdom as well as the hazards of forecasting, LNG World Shipping would nevertheless like to bravely provide some thoughts on how the industry will develop in 2018. Below are our top five likely outcomes for the year ahead.   

Freight rate surge

Nothing illustrates the dangers faced by forecasters better than when they are called on to pontificate about future freight returns. Being asked to state where spot cargo freight rates are likely to be 12 months from now is, for most, a poisoned chalice.

At the start of 2017 spot rates for LNG carriers on voyages east of Suez were around US$40,000/day, after being in the doldrums for 18 months. New tonnage was being delivered at a faster pace than liquefaction plants were being commissioned and by April returns had dropped even further below the breakeven point, to around US$25,000/day.

At that stage the pessimism among LNG consultants had gathered pace, to the extent that they believed the return to a more balanced shipping market would not occur before late 2018/early 2019, at the soonest. Despite a few more optimistic opinions, the consensus was that the average spot freight rate for 2018 would struggle to get above US$40,000.

It turns out that the optimistic minority had a better idea of the timing at which the demand for tonnage would strengthen. By the end of 2017 owners of modern LNGCs carrying cargoes to Asia were commanding spot rates of up to US$85,000/day, well above breakeven, and the number of spot fixtures had reached record levels.

The growing demand for tonnage has been buoyed by the 33M tonnes per annum (mta) of new nameplate production capacity commissioned in 2017; the rapidly rising demand for LNG in many countries, not least China and India; and the additional tonne-miles that come with longer voyages, such as those from the US to Asia. 

In addition, 2017’s newbuilding delivery schedule has not been as busy as originally planned as a result of delayed completion dates agreed by shipowners and yards for a number of vessels. Only 37 LNG vessels were completed in 2017, well down on the 57 originally timetabled.  

The pushback in the completion dates for some vessels means that shipbuilders are due to hand over 62 LNG carriers in 2018 which will be a new annual output record if achieved. Such a large influx of new shipping capacity will exert some downward pressure on spot rates during the coming year, but LNG World Shipping still believes the healthier rates will prove resilient. 

Stronger freight returns will be supported by another 30 mta of new liquefaction plant capacity coming onstream in 2018, additional demand for tonnage spurred by arbitrage opportunities and the resultant longer sea voyages to premium markets in Asia. Deliveries of growing US export volumes also involve long-distance journeys, aside from those to neighbouring Mexico.

Every 1 mta of LNG shipped from the US requires 1.7 modern, conventional size ships, 1.9 if only consignments to Asia are considered. The recent increase in enquiries for term charters is another reflection of the tightening shipping market. 

Bunkering infrastructure

The shipping industry’s commitment to the use of LNG as marine fuel continues to grow. There has been no greater catalyst for further development of the necessary bunkering infrastructure than the November 2017 decision by the French liner service operator CMA CGM to specify dual-fuel engines for nine new 22,000 TEU container ships

The newbuilds are the largest vessels of this type ever ordered and the largest ships that are not LNG carriers to be powered by LNG. Each will be provided with an 18,600 m3 LNG bunker tank of the membrane type. It is estimated that the 0.3 mta of LNG needed to power the nine vessels is a volume equal to that consumed by the entire existing fleet of 120 gas-powered ships.

The CMA CGM ultra-large container ships (ULCSs) will require a bunkering vessel of more than three times the size of the three LNG fuelling tankers currently in service. To facilitate safe and rapid LNG fuel transfers, it is likely that the new bunker vessel will also have a membrane tank and be based at a major port served by the container ships, such as Singapore or Shanghai.

Where CMA CGM and its LNG fuel suppliers lead, others will follow. The bunkering arrangements put in place for the ULCSs would also be able to service a wide range of vessels with more modest bunkering requirements. Look for a number of LNG bunkering hub construction announcements in 2018, a plethora of newbuilding orders for LNG-fuelled vessels of various sizes and announcements that existing LNG-ready ships will be converted to running on gas. 

The introduction of IMO’s lower global sulphur fuel cap of 0.5% is now only two years away. LNG offers one route to compliance and it has been estimated that approximately 5% of the world fleet of 55,000 commercial ships of over 500 GT will be running on gas early in the next decade. That translates into 2,750 LNG-powered ships by around 2023.  
 
FSRUs to the fore

Five floating storage and regasification units (FSRUs) were ordered in 2017 and four were delivered, building the existing fleet to 28 units. LNG World Shipping also logged mroe than 30 new FSRU-related project developments in 2017, as proposals for new floating regasification facilities are advanced. 

That momentum will be maintained in 2018, as more gas buyers wake up to the benefits offered by floaters to fast-track LNG imports in the most cost-effective way possible. As 2017 came to a close, Pakistan and Turkey commissioned their second FSRU-based import terminals and both countries have plans in place for further floaters. 

Of the 40 mta of new LNG regasification capacity due to come onstream in 2018 and early 2019, over 55% is likely to be provided by FSRU-based terminals. In 2018 India, Bangladesh and Puerto Rico are set to commence FSRU-based LNG imports while Russia, Ivory Coast and Ghana are poised to follow suit, probably early in 2019. 

Brazil, already home to FSRU terminals, plans to introduce a new floater at Sergipe in early 2019. Sergipe is an integrated gas-to-power project and Golar, the FSRU provider, has taken a 50% stake in the overall scheme in response to the increasing competitiveness of the standalone FSRU market. Barriers to entry and potential profits are higher in LNG-to-power projects and Golar is seeking to participate more in this sector going forward. 

Traders liven up spot market

The strengthening presence of commodity traders in the world of LNG will continue to develop in 2018. Traders such as Trafigura, Glencore, Vitol and Gunvor have proved to be adept at employing the classic trading model from other energy markets and applying it to LNG, using leased terminal infrastructure capacity and shipping charters to take advantage of opportunities.

The ability of trading houses to manage payment arrangements and the risks surrounding buyer terms and conditions have helped them increase their market share and swell their ranks. LNG market liquidity has been enhanced by the ability of new buyers to establish a presence and bring in gas supplies in a short period of time.

Trafigura provides a good example of the rapidly growing involvement of the trading community in the sector. The Amsterdam-based firm traded 8.1 mta of LNG in the financial year ended 30 September 2017, 27% up on a year earlier and a tenfold increase on 2013, its inaugural year in the sector. 

In 2017 Trafigura launched an initiative to promote a standard master sales and purchase agreement for LNG and continued with its project to reactivate the FSRU-based Teesside LNG import terminal in northeast England. The company also acquired a minority stake in the new Pakistan GasPort Ltd (PGPL) FSRU project at Port Qasim, Pakistan’s second such facility, and entered talks with PGPL with a view to partnering the construction of yet another Port Qasim FSRU import terminal.

Many gas buyers, sellers and financial institutions have also established LNG trading desks, and opportunities for consolidation are now being explored. In December 2017 Jera of Japan and France’s EDF signed a heads of agreement with the aim of integrating their respective LNG trading operations and improving the market competitiveness of LNG.  

Buyer power and flexible destinations

Of the many existing long-term, crude oil index-linked LNG SPAs due to expire over the next several years, few are likely to be renewed on the same terms. In their place will be more flexible contracts of shorter duration and with less onerous controls on LNG prices. 

The strength of the current buyers’ market is being reinforced by co-operative ventures between players, not least in Japan, importer of almost 30% of LNG shipped worldwide. Tokyo Electric Power and Chubu Electric Power, for example, integrated their thermal power generation businesses in June 2017 to form Jera. The joint venture purchases about 35 mta of LNG.     

More recently Tokyo Gas and Kyushu Electric Power announced plans to share LNG to cut procurement costs. Tokyo Gas already has a similar arrangement in place with Kansai Electric Power. 

In November 2017 Jera and Malaysia LNG announced that their long-term SPA contract, was being renegotiated in advance of the March 2018 expiry, and that the previous terms will be considerably relaxed. The agreement, previously of 15 years duration, will now only last three years and the volume will be drastically cut, to 2.5 mta. 

Shipments are likely to comprise a mix of delivered-ex-ship and free-on-board cargoes and there will be no destination clause in the contract. Jera will be free to ship cargoes to receiving terminals of its choice.

Earlier in 2017, Japan’s Fair Trade Commission declared that restrictions on reselling contracted LNG cargoes breach competition rules. Japan’s major gas buyers are touting the ruling and LNG sellers have little inclination to attempt to stem the tide of more flexible LNG trading.
 

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