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LNG World Shipping

Robust LNG supply and demand fundamentals set scene for tighter shipping market

Wed 15 Aug 2018 by Paul Wogan

Robust LNG supply and demand fundamentals set scene for tighter shipping market
Paul Wogan (GasLog): “The earliest a newbuilding can now be delivered is 2021, which points towards a tighter market in 2019 and 2020 and underpins the outlook for shipping rates”

With a number of LNG projects progressing towards final investment decision, the LNG shipping market could actually be short of vessels by 2019, writes Gaslog chief executive Paul Wogan

This is an exciting time to be in LNG shipping. LNG demand continues to surprise to the upside, eroding concerns of a near-term LNG supply overhang. Inter-basin voyages to exploit both the US – North East Asia, and Europe – North East Asia price arbitrage are driving tonne-miles higher, resulting in an increased demand for shipping.

Against this supportive backdrop, GasLog continues to expand its fleet, with five newbuilds scheduled to deliver in 2019 and 2020, two of which are uncommitted and expected to enter a tightening market.

Demand for LNG remains robust. According to Poten, LNG imports into China, South Korea and India during the first half of 2018 increased 50%, 14% and 10%, respectively. China’s LNG demand is being driven by several secular drivers: coal-to-gas switching, strong industrial demand and constrained domestic gas production.

However, it is not all about China. Global LNG demand growth is expected to be broad-based; South East Asia and Europe, for example, are forecast to account for over 60% of demand growth from 2017 to 2025. On the supply side, several projects continue to make positive progress towards a final investment decision.

“The arbitrage between the Atlantic and Pacific Basins is expected to remain open for the 2018/19 Northern Hemisphere winter, suggesting the recent increase in LNG shipping rates could be sustainable”

Against this positive outlook for LNG supply and demand, we are seeing a meaningful pick-up in enquiries for both multi-month and multi-year shipping charters.

Historically, each 1M tonnes of LNG shipped has required approximately 1.3 vessels. However, the advent of US LNG exports, based on cheap US gas prices, has led to increasing exports between the Atlantic and Pacific Basins. Since Sabine Pass came onstream in 2016, an average of 1.86 ships per M/tonnes of LNG has been required for US exports.

Spot LNG shipping rates exhibited counter-seasonal strength in May and June 2018, driven by increased vessel demand as LNG suppliers sought to capitalise on the inter-basin arbitrage. The number of spot fixtures rose to a record 110 during Q2 2018, a 41% increase year-on-year, and June spot shipping rates were at their highest since 2013.

While spot shipping rates have moderated in recent weeks, based on current forward JKM pricing, the arbitrage between the Atlantic and Pacific Basins is expected to remain open for the 2018/19 Northern Hemisphere winter. This suggests that the recent increase in LNG shipping rates could be sustainable.

According to Poten, 27 firm orders for LNG carriers have been placed so far in 2018, as shipowners lock in attractive yard pricing against a positive backdrop for LNG vessel demand. However, despite the current orderbook, we believe that the LNG shipping market could be short of vessels as soon as 2019, based on current supply and demand projections.

Excluding yard options, the earliest a newbuilding can now be delivered is 2021. This points towards a tighter market in 2019 and 2020, again underpinning the outlook for shipping rates.

Based on our analysis and excluding the current orderbook, north of 50 additional vessels may be needed by 2022 to satisfy projected market growth. This figure has the potential to increase to north of 130 additional vessels by 2025.

The LNG shipping industry has an enviable safety record. It is one thing to own an LNG carrier, but operating and managing these vessels safely and to an industry-leading standard takes many years of experience. For that reason, I believe that GasLog’s operational excellence and uncompromising approach to safety remains a differentiating factor when our customers look to their future LNG shipping requirements.

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