Could LNG shipping spot rates hit $250,000/day?
Spot day charter rates for LNG carriers have hit their highest levels since mid-2012 on the back of low prompt availability of vessels in both the Atlantic and Pacific basins.
This week, S&P Global Platts assessed Pacific and Atlantic day rates for LNG vessels at $140,000/day and $130,000/day, respectively, up 40% since mid-September, and nearly 3.5 times higher than a year ago when rates were still around $40,000/day.
The surge in rates indicates that LNG supply is growing faster than new ships are being delivered. The year 2018 will see the largest number of newbuild LNG carriers added to the global fleet, taking it well past the 500 mark.
Shipping typically accounts for 5%-20% of the delivered LNG price ex-ship, meaning big moves in rates can have a significant effect on the final price of gas, and the ability of traders to arbitrage LNG cargoes between regions.
Day rates first broke the 6-figure level around mid-September. Multiple shipping sources said no ships were available from independent ship-owners across both basins with chartering opportunities focused on relets from portfolio players or traders.
In the Pacific region, a spot charter for mid-November was reportedly north of $160,000/day, and several multi-month charters in the low-$100,000s/day.
“What we are about to witness in LNG shipping has only happened twice since 2008 with great magnitude,” Nicolay Dyvik, shipping research analyst at DNB Markets, said, adding that LNG freight rates could rise as much as $250,000/day if markets get tighter.
High freight rates are a product of tight supply of ships and strong arbitrage fundamentals that allow ship-owners to command higher charter rates. Dyvik said this last happened in 2008 in the dry bulk freight market, when Capesize rates hit $250,000/day, and in 2013-2014 when VLGC rates peaked at $150,000/day.
“Now it could happen in LNG,” he said earlier this week, adding that at last count, only two LNG vessels were available for prompt cargoes in the current market — one in the Middle East and one in the Far East region.
This is a long way from the lows of 2016 and 2017 when spot rates were hovering at $25,000/day, leaving ship owners struggling to breakeven with nearly 50 ships free on the spot market. Many owners had idled their LNG carriers and extended drydocking to avoid operating losses.
The LNG supply side ramp up isn’t’t quite done yet, leaving room for much higher vessel demand and providing the basis argument for even higher freight rates, especially in the Atlantic basin.
The projects ramping up in coming months are Shell’s Prelude Floating LNG, two trains at Inpex-operated Ichthys LNG in Australia, Train 5 of Cheniere’s Sabine Pass, Cheniere’s Corpus Christi and potentially the third train at Novatek’s Yamal LNG in the Russian Arctic.
That’s a whopping 27 million mt of new LNG supply that will need vessels. This will be followed by another 40 million mt/year of new LNG projects in the US by 2020, adding to Atlantic basin shipping demand.
“This trend is important to watch because US liquefaction capacity is currently only about 1/3 of where it will be by the end of 2020. This means that as the US represents a greater and greater percent of global supply, the weighted average shipping distance should also start to trend upwards,” Jeff Moore, Head of Asia LNG Analytics at S&P Global Platts, said in the new report titled “Supercooled: The evolving LNG fleet driving the global gas boom.”
Platts Analytics estimates that the average shipping distance for US LNG has shown the most dramatic increase in the last 5 years, due to shipments to Asia. It also states that the average shipping distance for a US LNG shipment is 9,268 nautical miles, more than double the 3,936 nautical miles for Australian LNG.
“This could have major implications on spot shipping prices as the limited number of LNG vessels could be tied up, as they look to serve longer and longer voyages,” Moore said.
Hence, LNG shipping rates are more likely to head upwards than downwards for now.