Higher volume of spot LNG trades seen in 2019
The global LNG shipping spot market is expected to remain strong in 2019 on the back of higher spot LNG demand and trading volume growth outpacing LNG vessel supply, according to analysts and ship brokers.
Higher spot freight rates could make inter-regional arbitrage less economic, making it costlier to ship LNG to Asian customers and impacting long-haul trades like the US-Asia trade route and reloads from Europe into Asia. However, in the long term higher rates could incentivize shipping companies and other stakeholders to invest in building new LNG ships to meet transportation demand and further develop the spot market.
The Asia Pacific Day Rate averaged $80,771/day in 2018 compared with $39,800/day in 2017, according to S&P Global Platts assessments. It had hit an all-time high of $190,000/day in November 2018, with a daily average of $183,333 for the whole month.
By the end of 2018, spot freight rates had corrected to $85,000/day, having averaged $133,944/day in December 2018, compared with $78,000/day in the same month a year earlier.
Market participants expect average spot charter rates in 2019 to remain strong, but said that exceeding the record high levels of $190,000/day is dependent on short-term trading strategies and market fundamentals that are not always sustainable.
“For 2019, the spot market will be equally strong or even stronger than what we have seen in 2018,” Poten & Partners’ shipbroker Rolv Stokmo said on the sidelines of a conference in December.
Spot charter rates dipped in the first quarter of 2018 partly because of the shutdown at PNG LNG due to the earthquake, Stokmo said. However, the rates bounced back up in the following quarters, and the third and fourth quarters of 2019 should be strong at similar levels.
LNG fleet growth slows
The global LNG fleet numbered around 536 vessels by the end of 2018, having posted a record growth of 12% during the year, mainly from the 120,000-199,999 cu m segment, according to Italian shipbroker Banchero Costa’s head of research Ralph Leszczynski.
Roughly 50 new LNG vessels were delivered in the first 11 months of 2018 and another 60 ordered for the full year, compared with 31 new deliveries and 23 new orders placed in 2017, mostly with capacity of 150,000-180,000 cu m each, industry data showed.
Despite this, LNG fleet growth is expected to slow considerably in the years to come with 2019 and 2020 posting an increase of 6% and 7%, respectively, Leszczynski said.
Much of the historic LNG fleet growth had been on account of vessels tied to long-term LNG projects as well as speculative ordering by investor groups such as Greek shipowners who bet on the growth of the spot market.
However, spot shipping rates between 2015-2017 often hovered under $30,000/day, below breakeven levels, discouraging new orders and tightening the spot market.
In 2019, only six uncommitted vessels are expected to hit the market and the rest are already committed to LNG projects as they come out of the shipyard, so very few uncommitted ships will be available to ease spot rates, Stokmo said.
He said spot freight rates depend on whether charterers want to lock-in ships for the longer term, in which case the number of cargoes or spot shipping requirements will drop, but it is unlikely that there will be fewer spot fixtures in 2019 than in 2018.
New LNG ship orders could also benefit from newbuilding prices falling to around $180 million for a standard 170,000 cu/m vessel at a South Korean shipyard, from over $210 million in 2009-2010, due to the decline in the shipbuilding sector.
“The downward trend is now reversed, but newbuilding prices still appears to be on the cheap side compared to the past,” Leszczynski said.
There is anecdotal evidence that investor interest in new LNG ships is gradually recovering, although it will take time to gather pace.
But LNG spot market grows
Overall, market expectations are for higher average spot LNG trades in 2019 than in 2018, as more liquefaction capacity comes online, mainly from the US, as well as continued growth in market liquidity.
Since US-origin LNG is flexible and new Asian spot demand has been centered in China, the US-China trade was projected to drive spot volumes. The surge in Chinese winter demand in 2017 was almost entirely on the spot market.
However, tepid winter demand in 2018 has kept JKM prices depressed at around $9/MMBtu and the US-China trade war has seen only two US-origin cargoes land in China in the fourth quarter of 2018, putting several of these projections at risk.
“Non price-responsive demand in Asia will be easily met, and forecasted JKM spot prices in the $7-$9/MMBtu range for H2 2019 will not be low enough to trigger substantial economic switching from coal to gas in power generation,” according to S&P Global Platts Analytics.
Platts Analytics said this means 2019 may see Europe finally playing its long-forecasted role of being a liquid market where suppliers, portfolio players and traders are able to market surplus LNG.
Shorter haul trades from the US to Europe are less supportive of shipping tonnage than shipping to Asia, and a lot will depend on how trading dynamics evolve. With new US-based portfolio players like Cheniere controlling an increasing number of LNG vessels on term-charters, growth in spot trade still has potential.
Small LNG projects crucial for the market
Low prices, abundant supply and an aggressive shift towards cleaner gas for energy generation are creating strong demand for LNG, not just from large buyers, but also from small importers, said Drewry.
In its market opinion report, Shefali Shokeen, Senior Research Analyst, Drewry Maritime Research said that small-scale LNG projects (production and regasification capacity of less than 500,000 tonnes per annum) have reduced capex and are suitable for countries with low LNG consumption.
For example Gibraltar has set up a small LNG import terminal with a total storage capacity of 5,000 cbm, which will directly provide fuel to the power plant located near the port.
It is also true that it is becoming increasingly difficult to secure investment for mega LNG export projects by fixing cargoes on long term contracts. Due to the increasing number of LNG suppliers, importers are opting for shorter term volume contracts. This makes small scale LNG projects attractive, which are cheaper to build and where there is less risk.
Although the number of small LNG export projects is currently limited new facilities are beginning to emerge. In the US for example, a small-LNG export project in Florida with three trains of 0.33 MTPA capacity has already been approved by the FERC.
Asian countries such as Indonesia, Philippines and China, along with some European countries will also see growth in the number of small-scale LNG imports terminals and in turn this will create demand for small LNG vessels.
On the export side, the list of LNG exporters will continue to diversify in the future as countries with moderate gas reserves develop opportunities to export LNG. In the near term, we expect countries in Africa to follow the lead set by the US by investing in small-scale LNG export projects. In turn, this will generate demand for appropriate shipping capacity.
The existing fleet of small LNG (less than 50,000 cbm) vessels consists of 27 LNG carriers and 17 LNG/LPG carriers, plus some LNG bunkering units. But most of the LNG and LNG/LPG ships are engaged in petchem gas trades and they are not expected to service new small scale LNG export projects.
LNG bunkering vessels are a potential source of competition, but the existing fleet is dedicated to LNG bunkering operations, while all of the vessels on order are also earmarked for LNG bunkering.
In order to achieve first mover advantage, some shipowners have already started ordering small LNG vessels. Five small-scale LNG carriers were in fact ordered in 2018 and in 2019 and beyond we expect to see more orders for small LNG carriers. Small is therefore likely to become the new big for the LNG shipping market.