LNG
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Record LNG Tanker Hire Prices to Subside in Spring
February 2021
An unprecedented shortage of liquefied natural gas tankers at the start of 2021 made these vessels the most expensive ships ever hired to transport commodities. Spot rates more than tripled in the past month, with BP Plc last month paying US$350,000 a day to charter an LNG tanker to pick up a cargo from the US.

The previous high for any kind of commodity carrier was set in late 2019 when a crude supertanker was booked for daily earnings of US$308,000, according to data compiled by Clarkson Research Services Ltd., a unit of the world’s biggest shipbroker.

  • Bullish factors have struck the LNG shipping market: robust Asian spot gas demand in a cold winter,
  • Record-high exports from US projects
  • Most importantly delays traversing the Panama Canal. Vessels have been forced to take longer routes to Asia, increasing transport time and significantly curbing the number of available vessels in the Atlantic.

The problem, similar to what is happening in the container sector, is that there are not enough LNG ships in existence to handle current demand.

 

Trading and Arbitrage Spread

Following COVID-19 lockdowns earlier in 2020, the spread between LNG commodity pricing in the US, Europe and Asia narrowed. When that spread is too low, the arbitrage profit doesn’t cover the charter cost, so shippers cancel cargoes. That dampens vessel demand and rates and decreases the volume at sea. One reported side effect was a plunge in transits of Asia-bound US cargoes via the Panama Canal.

Currently, rates for the larger vessels have jumped, as the arbitrage spread, especially to Asia, has opened up. Cancellations have largely ceased and charterers are attempting to lock in tonnage amid seasonal demand shifts.  The more LNG that goes from the US to Asia as opposed to Europe, the longer the voyages and the higher the vessel demand. That’s what is happening, which is good for spot rates and good for Panama Canal volumes.

The arbitrage spread in late 2020 shifted from the US Gulf/Europe — Henry Hub/Dutch TTF [hub pricing spreads] — to US Gulf/Northeast Asia — Henry Hub/Japan and Korea JKM.  This pushed up ton-mile demand on long-haul ships to Asia. Delays at the Panama Canal are also extending voyages and helping to bolster global fleet utilisation.

 

Bitterly Cold Winter

The La Niña weather pattern anticipated for 2020 was realised as severely cold weather conditions blasted the northern hemisphere in particular northeast Asia region — Japan, Korea and northern China and drove strong demand, especially for heating.  Back in the middle of 2020 there were some 45 cargo cancellations each month.  Cancellations were down to zero for December and January as demand surged and LNG carrier spot rates achieved record highs.

 

Spot Rate Rally May Not Have Legs

The spot rate rally is being viewed as short-term in nature, driven by winter demand and wide LNG price arbitrages.  In the case of container shipping, COVID-19 has supercharged rates as consumers switch purchasing from services to goods. In the case of LNG, shipping rates have been driven up by extreme winter weather in Asia (LNG is used to generate power for heating), LNG production outages in Asia and Panama Canal congestion. The tightness will doubtless ease with moderating weather. However, the fact that prices are as high as they are, is indicative of stronger underlying demand even after seasonal adjustments. The industry expects LNG carrier spot rates will remain robust during the March quarter 2021 as the arbitrage spread window remains open.  Once the winter spike is over, we would expect to see spot rates come down and availability of vessels to rise. By late January spot charter rates slid from recent highs.  Carriers fixed for US to northeast Asia journeys, fell to US$248,000 per day from around US$290,000 per day earlier in the month, while US to northwest Europe, also dropped to US$226,000 per day from around US$267,000 per day.

 

Orderbook is High

The LNG market is going to be long, with LNG cargo supply over demand into next spring and summer. As prices fall back out of the money, it’s fairly likely the industry will see some cargo cancellations out of the US again, although not to the same degree experienced in 2020. There will still be a significant surplus of LNG supply in spring and summer 2021.  Yet another concern is the high newbuilds backlog for LNG carriers, which will add more vessel supply and create headwinds for rates. Orderbooks are historically low for crude and product tankers, bulkers and container ships. Not so for LNG tankers. The current orderbook for LNG vessels is equivalent to 23% of the existing fleet. However, 2021 will probably not be the panacea to the problems of 2020.

 

COVID-19 fallout: FIDs halted

Fleet growth should be roughly the same as it has been over the past six years. But this has been supported by quite good demand growth.  The question is: Will we see the same good demand growth in the coming years? The answer to that is no.  In the wake of COVID-19, final investment decisions (FIDs) for new LNG export projects have ground to a halt. Existing construction has continued, but all the new investment decisions are being postponed. That’s a key issue. Fewer FIDs equate to less incremental volume at sea in the years ahead.

Seasonal strength notwithstanding, the industry does not foresee another cyclical upcycle for LNG shipping until 2024-25. If that is right, that’s too long of a wait for most equity investors. 

 

Exposure and Timing

In the near term, listed LNG companies with ships in the spot market or with variable-rate time charters stand to benefit.

  • Flex LNG have reported that their 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.
  • Golar LNG has less exposure to current rates, as well as significant non-LNG exposure. The company stated they have ships on 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.

But even for companies with spot exposure, it ultimately comes down to timing.  A round-trip voyage from the US to Asia takes two to three months. Very few LNG carriers are on spot, unemployed and in the right position to take advantage of today’s unprecedented rates.