Gastech 25 LPG & Petrochemical Shipping: Current Status & Outlook A better market, but for how long? Nicola Williams Gas & Chemicals Division Clarksons Gastech 25
Overview of the LPG Carrier Fleet It is my intention to discuss the different size categories of non-lng gas carriers, their main characteristics, similarities & differences in terms of cargoes carried, movements in freight rates, age profile & prospects. By way of introduction, the largest size sector is over 6, cbm and is labelled VLGC s. These vessels trade in LPG and occasionally in CPP. These vessels are fully-refrigerated, enabling them to transport LPG in its liquid state, but some vessels also have cargo reheaters on board to allow them to warm the cargo for discharge into pressurised/semi-ref storage. These vessels trade mainly LPG AG-East and also West, ex-w.africa West or Esst, including China, Ex Med into Europe and the US (also into Asia), and ex-us on occasion. Older vessels may also be used for storage, traditionally China (though shore storages are expanding) as well as for projects in Africa, Asia and also Suez. This size sector is followed by the LGC s, 4-6, cbm, which are also fully-refrigerated carriers. These vessels trade LPG, Ammonia & also occasionally CPP. The Midsize sector spans Fully-ref vessels between 17-4, cbm and these vessels trade Ammonia & LPG. At the lower end of this size category there are also some Semi-ref carriers which ideally seek petrochemical gas employment. The Semi-ref vessels can maintain cargo in a liquid state by refrigeration or by a combination of pressure & refrigeration. Also within this size are the 5 x Navigator Ethylene carriers which are the largest of their kind. Under this size range the fleet consists of Ethylene/semi-ref & finally pressurised tonnage. The primary cargo for the Ethylene carriers is, perhaps unsurprisingly, Ethylene but they can also move other gas cargoes. The semiref carriers oscillate between Petchems & LPG (depending upon the strength of the respective sectors) and some may occasionally trade Ammonia although this could limit onward trading possibilities, particularly in Petchems. Pressurised tonnage is sized up to 11, cbm and these vessels transport cargo under pressure and trade mainly in LPG although they may also transport petchems or be chartered for Ammonia (usually on a term basis, because of the potential undesirability of this product as a last cargo). Today, the LPG Gas carrier market is in a very different place than it was 18 months ago. Although no parallels can be drawn with the phenomenal shift in fortune of other sectors of the shipping markets, upward movements in freight levels, slowing fleet expansion, strong growth in trade volumes and tightening shipyard capacity for newbuildings are indicating a bullish outlook for the next few years. Consequently, the spotlight has moved on to the gas fleet as an area of interest for new players as it began to be perceived as an undervalued market sector and also one which is in transition. My paper will examine where the market is today, before dissecting the principal factors which are expected to shape the market over the balance of this decade. The upturn in sentiment across all sectors of the LPG carrier market started in the 4 th quarter of 23. Prior to this, rates in most of the sectors had been depressed for a few years suffering the combined effects of fundamental fleet oversupply and uninspiring (even negative) trade growth. In the latter part of 23 this started to change for a number of reasons; the global economy entered a period of sustained economic growth, most notably in Asia which underpinned import requirements. A number of older candidates had been removed between 22 to 24, which actually resulted in a net contraction of the VLGC fleet in cubic terms in 22 and in the midsizes in 23. At the same time, weaker market performance and competition from other sectors of the shipping market led to a slowdown in contracting activity in this sector. The yard situation is currently very tight and this has also played a role in firming sentiment. These factors have been central in shaping market direction at a time when we have also entered a period of positive trade growth. On the LPG side, there has been a recovery in Middle Eastern export volumes alongside growth in Atlantic Basin supplies. Strong demand in both Western & Eastern hemispheres has helped to create sporadic arbitrage opportunities, which have generated additional tonne-mile demand. Seaborne Ammonia trade has also expanded over the same period while over the last 12 months, unscheduled cracker outages and firm Petrochemical demand have also reinvigorated long-haul petrochemical cargoes which combined with further fleet consolidation of the pressure, semi-ref & Ethylene fleets have pushed spot rates to some of the highest levels witnessed since the mid 9 s. It is often said of crystal ball gazers & forecasters let them eat glass and I would not be so bold as to project freight rates forward - telling Owners what they should expect to command, nor Charterers what they will have to pay for freight. However, what appears to be an established market reality for the next few years is the continued growth in overall trade volumes combined with a deteriorating fleet age profile and an established number of vessels for delivery through into 28. A considerable proportion of the LPG volumes will feed through into larger vessel demand, although there will be some trickle down effect to the sizes below, whilst Ammonia trade growth will impact the LGC s & Midsizes specifically. Additional Petchem volumes from the Middle East combined with anticipated regional imbalances in Asian & European supply versus demand should also help to maintain sentiment for the Semi-ref & Ethylene sectors. Turning to the fleet supply side of the equation, I will start with the largest ship sector first. The market leader, Bergesen, controls almost 35% of the cubic in this sector. Despite this concentration of commercial control, (except for brief spikes) returns have been weak over the last few years, pressured by fleet expansion & very low levels of trade growth and as a result we even saw up to 1 vessels trading in CPP on occasion in 23 & 24. From the middle of 23, rates have been on an upward trajectory as the oversupply of tonnage has contracted following the removal of several older units over the last few years, a slowdown in the number of newbuilding deliveries and a growth in tonne- Gastech 25 Williams 2
mile demand. More recently, we have also seen further consolidation with A.P. Moller having acquired the 3 vessels Trammo had on TC. As a result of the factors listed above, we have seen idle time fall, rates AG-Japan remaining above the $4 level and tonnage return to LPG trading from CPP. It should be noted that over the same period bunker prices have been very firm, port costs have risen and the dollar has weakened which has eroded the actual return to Owners from these increased freights. VLGC Spot Rates - AG/Japan $ PMT 55 5 45 4 35 3 25 2 15 1 Feb-97 Jun-97 basis 43, MT Trendline Oct-97 Feb-98 Jun-98 Oct-98 Feb-99 Jun-99 Oct-99 Feb- Jun- Oct- Feb-1 Jun-1 Oct-1 Feb-2 Jun-2 Oct-2 Feb-3 Jun-3 Oct-3 Feb-4 Jun-4 Oct-4 The outlook remains firm for the next few years, given the additional cubic demand expected to be generated by new LPG volumes from the AG & Atlantic Basin suppliers (mainly West Africa), the deteriorating age profile of the fleet (there will be 33 vessels aged 25 years plus by the end of 28) and the difficulty in obtaining pre-second half 28 delivery positions from the shipyards due to the competition from other sectors of the shipping market namely, LNG, Containers, Tankers & Dry Bulk which have been competing for yard space & driving newbuilding prices up. The next graph clearly illustrates the fact that the volume of tonnage entering the 25 years plus category by the end of 28 will exceed the current volume of tonnage scheduled for delivery. In cubic terms this is 1.77 million cbm on the orderbook as against just over 2.25 million cubic that would be aged 25 years plus. Cbm 2,25, 2,, 1,75, 1,5, 1,25, 1,, 75, 5, 25, Current VLGC Fleet Age Profile 25 Yrs+ 2-24 Yrs 15-19 Yrs 1-14 Yrs 5-9 Yrs 24 25 26 27 28 Gastech 25 Williams 3
Our next graph reveals the potential fleet balance, if vessels aged 25 yrs plus were to be removed. In reality, Owners would postpone scrapping if the market moved upwards and consequently fleet replacement requirements would not be so severe. Age does not necessarily indicate a decline in tonnage quality; issues of fleet maintenance and quality management may be far more pertinent factors. However, Charterers current preference for more modern candidates and the possibility of change in regulations need also to be considered. ' Cbm 1, 8, 6, VLGC Carriers Forward Fleet Development (Assuming vessels 25 Yrs+ Scrapped) Potential shortfall on current fleet if vessels 25 years+ were scrapped Newbuildings (current O/B) 4, 2, Current Fleet Existing Fleet up to 25 Yrs old -2, -4, End 24 Scrapping Candidates Vessels 25 Yrs & over End 28 LGC s 4-6, cbm Moving on to the next size down, the fate of the LGC sector has mapped the largest size to some extent, although the peaks & troughs have not been quite so pronounced. In fact rates for the 5 s did not collapse by the magnitude that those of the VLGC did in 21, as there were only a limited number of modern vessels available for charter. Although rates came under pressure from newbuilding deliveries through 23/4 this was to some extent mitigated by the removal of a similar number of older units. Once again, rates have been on the ascendancy through 24 and are now at the highs reached early 21 of the mid $8, s. 115 Historical 1 Year Timecharter Rates $' pcm 1 85 7 55 78,cbm 57,cbm 4 Feb-99 Jun-99 Oct-99 Feb- Jun- Oct- Feb-1 Jun-1 Oct-1 Feb-2 Jun-2 Oct-2 Feb-3 Jun-3 Oct-3 Feb-4 Jun-4 Oct-4 Gastech 25 Williams 4
The two distinct differences vis-a-vis the VLGC fleet is that ownership is more concentrated, with Bergesen currently controlling 64% of the fleet in this size, and also that Ammonia provides a very important source of employment. There is an element of bipolarity in the fleet with the older candidates in Ammonia & the more modern units tending to trade in LPG. With the growth in LPG trade & longer haul Ammonia movements this has helped to support this sector at a time of static shipping supply. There are only 2 vessels remaining on the orderbook which are scheduled for delivery this year & at the same time by the end of 25 almost 4% of this fleet sector will be aged 25 years plus. Given the vessel supply scenario & the anticipated demand for the larger vessels, the fortunes of this sector should largely track the VL s, although when the bulk of the midsize newbuildings deliver in 26 & 27 they may start to feel some pressure from the size sector below. Age Profile LGC Fleet 4-6, cbm Thousands Cbm 5 45 4 35 8 6 By the end of 25, almost 4% of the fleet will be aged 25 years+ 8 3 25 4 2 15 2 1 5-25 Yrs + 2-24 15-19 1-14 5-9 - February 25 25 The Midsizes 17-4, cbm The Midsizes have enjoyed a rather less volatile track-record than other sectors of the gas fleet hence, perhaps, one of the reasons why the orderbook has expanded considerably since the start of this year. I Year Timecharter Rates Midsizes $' pcm 9 85 8 75 7 65 6 55 5 45 4 35, cbm 3, cbm 24, cbm Feb-99 Jun-99 Oct-99 Feb- Jun- Oct- Feb-1 Jun-1 Oct-1 Feb-2 Jun-2 Oct-2 Feb-3 Jun-3 Oct-3 Feb-4 Jun-4 Oct-4 Nevertheless, like other sectors of the fleet the Midsizes have suffered from sporadic idle time. One of the key characteristics of this sector has been the heavy consolidation in this size, with the Exmar Midsize pool controlling approximately 46% of the cubic. As with the LGC s, Ammonia provides a crucial source of employment and over the last few years had accounted for a rising proportion of vessel coverage, specifically term related, although with growth in LPG supply this sector has been also been increasing market share more recently. Through the third & fourth quarters of 24, LPG cargoes & Ammonia were also competing heavily on the spot market, an example being rising US import demand for both cargoes. There is limited change expected on the supply side through into the latter part of 25, when one newbuilding will enter the fleet. Newbulding deliveries accelerate in 26 & 27, with the balance of a further 15 fully-refrigerated ships in this size category scheduled for delivery over this period. In my view, the warning bells are Gastech 25 Williams 5
beginning to ring and there would now appear to be a need for exercising some restraint in placing additional orders in this size category, particularly in light of the fact that this sector also has a more youthful age profile. Nevertheless, a number of newbuildings are already committed against new Ammonia projects and we expect that LPG export growth, notably in the Western Hemisphere, is likely to have some trickle down effect from the larger sizes. 11 86 Age Profile Fully-Ref Mid Size Fleet 17-4,2 cbm Thousands Cbm 45 4 35 3 25 2 15 6 8 4 13 11 9 6 9 1 5 1 25 Yrs + 2-24 15-19 1-14 5-9 25 26 27 Semi-Ref & Ethylene Fleet > 12, cbm Tonnage over-supply and a contraction in long-haul petchems trade have ensured that rates for Ethylene tonnage fell away from the start of 21 and stayed low until the end of 23. At that time, A.P. Moller & NGC announced the formation of the MNGC pool which incorporated both parties Ethylene carriers (albeit that this has a more significant impact on the size category below). This consolidation, combined with a recovery in export/import volumes, the resurgence of long-haul Petchem movements and a contraction in idle time helped to push rates upwards. Spot rate increases accelerated from the 2 nd quarter of 24 for a number of reasons; strong Petchems demand in Asia in the form of longer haul propylene movements from the US, firm Butadiene demand in the East (which attracted cargoes from Europe) and the continuation of Propylene volumes from the Americas into Europe. In the 4 th quarter, falling prices in Asia saw product redirected from Asia in to Europe. For the first time in a number of years, it was the Petchem market that was driving demand rather than LPG and Owners were afforded the opportunity to place their tonnage back in the premium trades. Longer haul loaded legs also meant longer haul ballast legs which placed further pressure on the availability of tonnage and on $ pmt freights. At the same time LPG employment was also more buoyant which added additional support to market sentiment and also helped to underpin higher spot freight and assessed timecharter levels. Assessed 1 Year Timecharter Rates 65 6 55 $' pcm 5 45 4 35 3 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan- Jul- Jan-1 Jul-1 Jan-2 Jul-2 Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 15, cbm S/R Gastech 25 Williams 6
It is worth noting that the 5 x Navigator 22,5 cbm Ethylene vessels (amongst the largest Ethylene carriers to have been built) were not drawn into Ethylene business despite the upturn in longer haul trades, since they remain for the most part too large for many Petrochemical terminals. They were, however, much in demand for LPG and Ammonia business given the strength in demand for Midsize tonnage and the relatively static fleet supply in this sector. Although the fleet has undergone a period of expansion over the last few years, particularly if we extract over 1, cbm of capacity in the form of the Navigator ships which were delivered in 2, there is a very small proportion of the fleet on order. This is illustrated by comparison with the volume of tonnage aged 25 years and over. Ethylene export volumes from Iran are expected to increase later this year, building through to 26/7 to a level of around 5, mt (high case) at the same time volumes from Saudi Arabia are also set to rise during a period when import demand looks set to remain healthy in Europe and in the East. Demand in the East should also continue to pull Propylene volumes from the US and Butadiene demand is expected to continue to rise. Overall, we are building an additional half a million tonnes into our Petchem trade figures from 24-28. At the same time, rising LPG volumes will also remain a positive factor. Age Profile of the Fleet >12, cbm Cbm 2 18 16 14 12 1 8 6 4 2 25 Yrs+ 2-24 Yrs 15-19 Yrs 1-14 Yrs 5-9 Yrs Semi-Ref Ethylene 25 26 27 28 Semi-Ref/Ethylene & Pressurised Carriers <12, cbm This size category appears to have benefited most from the upturn in Petchems activity over the last 12 months, although it had been one of the sectors hardest hit over the last few years. Due to the combined effects of fleet consolidation and more active Petchems & LPG activity, idle time has fallen considerably and freights have moved sharply upwards. Petchems have been central to the recovery, with unscheduled downtime at European and Asian crackers stimulating import requirements this year from sources further afield, specifically from the US in to Europe & there were also movements from Asia back to Europe in the 4 th quarter. This coincided with heavy spot volumes into Europe combined with firm intra-regional movements within N.W.E & the Med and also movements of Butadiene & Propylene out to the East. Although Ethylene exports from the Middle East were lower in the first half, in the latter part of the year export volumes recovered with cargoes moving both East & West. Rates for pressure tonnage have also strengthened due to increased Petchem & LPG volumes, further consolidation in this sector as the ExmarKosan pool absorbed the Far East Shipping fleet, static fleet supply and the entry of new players into the market which has helped to stimulate secondhand values & freight expectations. If we turn to the fleet profile, we can note that although there has been renewed activity in contracting as rates have moved upwards, the orderbook remains moderate. One cautionary note is the speed with which pressure tonnage can be turned around from the shipyards. However, with shipyard capacity tightening this should help to moderate this sector s fleet growth pre-27/8. Gastech 25 Williams 7
Age Profile of the Fleet <12, cbm Cbm 6 5 4 3 2 1 Pressurised Semi-Ref Ethylene 25 Yrs+ 2-24 Yrs 15-19 Yrs 1-14 Yrs 5-9 Yrs 25 26 27 28 Concluding Remarks In all sectors the fortunes of the Gas carrier market have improved. But is this just another brief spike or is the recovery expected to be of a longer duration? We expect the significant new volumes of LPG which are expected to come on stream through to the end of this decade and into the next to be important driving forces of demand, most notably for the VLGC s & LGC s, but also for the Midsizes and smaller ships as intra-regional trades are stimulated. Over the same period, Ammonia trade is also set to continue to expand, reaching close to 18 m mt by end 21, though there could be a contraction in tonne-mile demand on some routes. With the improvement in trade volumes and fairly positive outlook for economic growth in the East, especially China, the outlook is encouraging for the Ethylene carriers and smaller semi-ref vessels, particularly given the shift in trading patterns which are expected as a result of expansion in capacity from the Middle East. Over the same period, the deteriorating age profile of the fleet, albeit that the scale differs between size sectors, suggests further removals. This is not necessarily on the basis of age indicating poor quality, but rather the practicality of continuing to trade older tonnage and the costs of putting a vessel through 6 th Special Survey. Whilst a strengthening market may delay the decision to scrap, firm scrap prices and the possibility of tightening age regulations cannot be excluded from these considerations. Newbuilding prices have risen considerably over the last 12 months and many Owners have preferred to invest in other vessel types which have historically, or are expected to bear more healthy returns. Owners may need support from Charterers before going out to contract at today s very high newbuilding prices. Nevertheless, with the prospects improving for the non-lng Gas Carrier market and with Owners in other sectors sitting on substantial financial reserves the market has started to attract interest from new player & there have even been some speculative orders placed. This perhaps raises some interesting questions for the fate of consolidation in the respective size categories. A cautionary note to this upbeat outlook with worldwide shipyard capacity at an historical high, it is not inconceivable that when the appetite for ordering other vessel types recedes that this would free up additional shipyard capacity for LPG vessels which could lead to a flurry of additional ordering and vessel deliveries before the end of the decade. However, this is not an issue which has to be confronted just yet and for most sectors we are now looking at 28 delivery earliest. Based on the current age profile of the fleet, positive trade growth forecasts and the fact that we are faced with a finite amount of deliveries pre-28, we do not foresee a change in the current market dynamic near term & freight levels are expected to remain firm. 14. 12. 1. 8. 6. 4. 2. m. cgt Tankers Gas Other Bulkers Container The graph below illustrates the recent spate of vessel ordering &. the position of LPG in the wider shipbuilding panorama. (n.b The big increase in the Gas sector over the last 12-18 months is primarily comprised of LNG orders). Quartely Contracting by m.cgt Gastech 25 Williams 8 2Q97 4Q97 2Q98 4Q98 2Q99 4Q99 2Q 4Q 2Q1 4Q1 2Q2 4Q2 2Q3 4Q3 Source: Clarkson Research Studies 2Q4 4Q4
Clarksons The Market Leader in Gas Shipping LPG, Ammonia & Petrochemical Gas Chartering Spot, COA & Timecharter Project & Consultancy work Sale & Purchase Vessel & Fleet Valuations CLARKSONS GAS DEPARTMENT 12 Camomile Street LONDON, EC3A 7BP Telephone: +44 ()2 7334 399 Fax: +44()2 7867 361 E-mail: gas@clarksons.co.uk Gastech 25 Williams 9