The shipping industry has created a milestone as it set a new shipping rate of $350,000 per day because of a surge in LNG shipping. However, this record-breaking rate is likely to be short-lived as it’s expected to subside by Spring.
The container shipping record books had a busy time this year as rates skyrocketed. Today it has become more expensive to move containers across the ocean. This along with LNG shipping is ushering in a new era in container shipping.
Argus reported that BP has just employed the ship LNG Abalamabie for $350,000 per day, making it the biggest vessel charter price rise in maritime history. This surpassed the $300,000-per-day peak previously held by the VLCC segment.
LNG Making Cargo Shipping Profitable
And as LNG shipping gains momentum cargo shipping becomes more profitable. In fact, this is the one thing that differentiates an LNG record from a container shipping record. LNG deals are always lucrative for cargo shippers.
This is witnessed by LNG shippers in Asia who are pocketing massive profits compared to their US counterparts. Even while paying such high rates of transporting cargo across the Atlantic to the Pacific Basin, they get a substantial profit.
This is a stark contrast from what happened in the container and crude sector. High VLCC rates literally whipped out refiners’ margins as transport cost was too high which ultimately resulted in refiners ceasing to book cargoes and rates falling back. For the container sector, the transport cost is so high that importers are losing profits and selling goods at a loss as they can’t halt imports and lose market share.
But in the case of LNG shipping, there is plenty of scope of leveraging through the rise and fall of rates and continues to profit from cargo movement. However, one factor plays spoilsports in LNG shipping – the absence of adequate no. of LNG ships. There’s simply isn’t enough ships to cater to the demand.
Reason for Increase in LNG Rates
Clarksons Platou Securities explained, “The Platts Far East assessment surpassed $21 per MMBtu [million British thermal units] at the end of last week, which compares to U.S. Henry Hub natural gas prices below $2 per MMBtu.
“This has fueled LNG spot vessel demand, leading to rates above $300,000 per day. While the rate jumps off the page, the freight cost equates to around $5.50 per MMBtu — well within the wide $18 per MMBtu spread between the regions,” said Clarksons.
According to Clarkson’s assessment, the average rates for modern two-stroke LNG carriers is at $215,000 per day. At this time, last year, rates for a comparable ship were $103,000 per day. However, shippers aren’t able to find ships to load cargo even after paying such high rates.
According to Argus Media report, “A number of U.S. offtakers opted to turn down February volumes in December, because of an inability to find the vessels to load their contractual cargoes. Offtakers that opted not to turn down their February volumes are now finding themselves with cargoes that they cannot find the tonnage [for].”
Will it last?
But now the million-dollar question is how long this Guinness book of record LNG rates last and what happens when it falls.
For container rates, COVID played a crucial role as consumers purchased more goods in lockdown and switched from services to goods. However, for LNG the rates are high due to the winter price surge in Asia, fueled by production outages in Asia and congestion in the Panama Canal area which is likely to wither as the weather conditions change.
According to Stifel shipping analyst Ben Nolan, “The tightness …will doubtless ease with moderating weather. However, we believe the fact that prices are as high as they are is indicative of stronger underlying demand even after seasonal adjustments.”
According to Jefferies analyst Randy Giveans, “We expect LNG carrier spot rates will remain robust during Q1 2021 as the arb [arbitrage] window remains open.”
Newbuilds Coming in the Future
A large wave of new builds is coming which might make the Q1 bearish suggests Toby Dunipace, head of gas at brokerage SSY
Despite being a turbulent year, the LNG orderbook has been bustling in 2020 and many of these new builds are nearing delivery.
- Alphaliner estimated that the containership orderbook represents just 10.4% of the capacity of the on-the-water fleet.
- According to Clarksons, the orderbook-to-fleet ratio in LNG shipping is more than double that, at 26.1%.
In SSY’s annual outlook released on Monday, Dunipace warned, “The [LNG] market will more than likely slide during March at the latest, when a significant amount of LNG newbuildings are delivered. Newbuildings will continue to deliver through Q2 and Q3 and ships also come off time charter during this period. Overall, the market projections are very bearish for Q2 and Q3 2021.”
At Right Place in the Right Time
However, all is not over for the LNG sector as being at the right place at the right moment will favor LNG shipping companies as ships in the spot market or with variable-rate time charters stand to benefit.
- Recently, Flex LNG CEO Øystein Kalleklev reported that his company has three ships on fixed time charters, three on variable hire, and four in the spot market. Flex LNG’s share price is up 68% over the past six months.
- Iain Ross, Golar’s CEO, said that they are doing index-linked charters and a couple of ships that could potentially be in the spot market. But the vast majority of the fleet is on a fixed-rate structure, some of it up to a year and some slightly longer.”
- GasLog LNG reported that half of its ships were in the short-term or spot market, or had variable charters.
However, despite spot exposure, timing will be the key now. Today a round-trip voyage from the US to Asia takes 3 months and we don’t have enough LNG ships to take on that journey which can take advantage of these high freight rates. The same thing happened with the VLCC market back in Oçtober 2019 and March 2020 when the rates Soares but very few owners could take advantage to gain from it.