Analysis: Long route to Asia may be the best bet for US LNG exporters in weak market
The most curious aspect of two tankers’ current voyage from US Gulf Coast LNG terminals may not be whether their cargoes land in China or somewhere in between — but, rather, the route they are taking to get there.
Heading East toward the Cape of Good Hope, the Total-chartered SK Resolute and Naturgy-chartered Hoegh Giant have avoided the much shorter but pricey passage through the Panama Canal and the currently discounted passage through the Suez Canal. If they eventually unload in East Asia, they will have taken more than a month to get there.
Ultra-low international spot prices are forcing offtakers from the US to scrape the barrel for premiums, and that means staying on the water longer in hopes of getting a higher netback in the future. Voyage length for tankers from the US Gulf Coast to East Asia is averaging three more days than during the same period a year ago, S&P Global Platts Analytics data showed.
“It essentially becomes floating storage,” said Michael Webber, managing partner of investment research firm Webber Research & Advisory. “If the spot pricing is weak and there is contango in the curve, depending on how the pricing is structured, maybe you want to take the time getting there.”
Taking the eastbound route rather than westbound route to Asia should take nine to 13 days longer, depending on whether the tankers go around Africa or through the Middle East. Tanker day rates have dropped by half from the beginning of the year to $48,000 as of this week, and charters can often lock in better rates.
If booked a month ago — the lengthiest voyage would have cost an extra 22 cents/MMBtu, Platts Analytics data showed. Weak LNG prices due to lower than expected demand, exacerbated by the coronavirus pandemic, means offtakers from the US are willing to absorb the extra cost and the boil-off from the longer voyage. Since January, the voyage length from the Gulf Coast to Asia has been getting consistently longer — growing 11.4% year over year, or over three days, Platts Analytics data showed.
The canal operators are taking notice.
The Suez Canal Authority is temporarily offering LNG tankers that load on the US Gulf Coast and deliver to East Asia a rebate of 75% of normal Suez tolls if they pass through the canal, according to a circular on the agency’s website. Deliveries through the canal to ports in the Arabian Gulf and in India will get rebates of 35%-55%, the circular said. The offering took effect April 1 and runs through June 30.
Gross fees of the Suez and Panama canals are comparable, but with the current rebate for US Gulf Coast cargoes, Egyptian transits offer a major advantage. However, this rebate does not make up for the additional 10-day voyage at an incremental cost of 2.4 cents/day, Platts Analytics data showed.
The latest Panama Canal toll structure was approved in September 2019 and is still rolling out, with the last modification to be implemented on May 1. The Panama Canal Authority, in an e-mail responding to questions, wouldn’t say specifically whether the operator plans to match the Suez toll rebates. But it did say the canal was expecting to see fewer transits in the coming weeks.
“At this time, we’re operating in a very fluid environment,” the Panama Canal Authority said. “We anticipate further insight in the days to come.”
The agency said it expected more traffic due to the opening of new US liquefaction terminals, “but the market has been weak since before COVID-19 with low prices in Asia.”
Tariffs and seasonal factors also are in play.
Chinese tariffs of 25% on imports of US LNG remain in effect, though offtakers can apply for exemptions from Beijing. Without waivers, the marginal cost of delivering to China has not been economic during the year since the last delivery in March 2019.
There is a clear seasonal pattern in high demand periods in November, December, January, July and August, with a greater share of vessels looking to go to Asia through the Panama Canal. The Cape of Good Hope and Suez will generally see increased activity in shoulder periods as charterers take advantage of the contango in the curve.
While the Suez route is faster than rounding the Cape, the Suez has the advantage of greater optionality as it passes over 80% of the world’s LNG demand on the way to the Japan-South Korea region. It is not uncommon for LNG tankers to change captain’s destinations along their voyage.
“You’ll see people taking off out into the Gulf and not knowing where they are going, heading in an open-ended direction,” Webber said. “I think you are seeing some of that.”