Given the weak freight rate outlook for LPG shipping over the next twelve months, Drewry believes there is more downside risk to the second-hand values of very large gas carriers (VLGCs), according to the latest edition of the LPG Forecaster, published by global shipping consultancy Drewry.
Shipping analysts have been bearish on the VLGCs market since the beginning of the year and rates so far have been in line with expectations. Vessel earnings in the spot market are currently below operating cost. Drewry maintains a bearish outlook and believes that the next twelve months will continue to be tough for VLGC owners due to strong fleet growth. The recovery phase will not start until the second half of 2018 as fleet growth slows as a consequence of weak ordering over the past 18 months.
One anomaly in the current market is that second-hand VLGC values have not come down as sharply as the freight market and are trading at a high multiple to vessel earnings. For instance, the asset price of a five-year old VLGC is currently trading at a high multiple of 26 to its EBITDA, while historically (2011-15) it has traded at an average multiple of eight. Similarly, the asset price of a 10-year old VLGC is trading at a multiple of 20 to its EBITDA, as compared with the historical average of six.
“Considering our weak freight outlook for the next twelve months, we expect there is more downside risk to second-hand values of VLGCs. Therefore, we expect second-hand prices of VLGCs to correct by another 5%-8% over the next one year,” commented Shresth Sharma, senior analyst for gas shipping at Drewry.