Persian Gulf-Japan VLGC rates soar to highest in nearly 2 years, with more upside seen
VLGC rates on the key Persian Gulf-Japan route extended a three-month rally to reach their highest for almost two years at $115.5/mt Nov. 3, with Middle East loading activity being driven by strong Asian demand, an active US market and a recovery in Australian exports since August.
Delays in discharge at several Eastern ports and Panama Canal transits are also limiting vessel supply, helping to push rates higher, according to sources.
“The [Persian Gulf] has been more active the last four to five months, as some suppliers are controlling their own tons, that is fixing in vessels themselves, and production has increased in the region as well,” a shipping source said.
Saudi Aramco’s trading arm, Aramco Trading Co., has been offering this year three to seven CFR spot LPG cargoes/month, on top of baseload volumes, traders said.
Term discussions for 2023 supply between Aramco and lifters are ongoing. If any reductions ensued, balance supply would be diverted to the spot market, spurring VLGC demand, sources said.
Shantanu Bhushan, senior consultant with Poten & Partners LPG/NGL Consulting said the trend upwards in freight rates over recent months had “been influenced by a tight November vessel position list in the [Persian Gulf], coupled with healthy volume of fixtures — 31 reported in September and 27 in October from the region.”
East Asian winter stockpiling and an increase in propane dehydrogenation plant operating rates in China was spurring demand, he said, pointing to PDH runs rising from the low 60s% in early-September to the low 80s% by the end of October, together with the completion of new projects.
Poten’s VLGC fixtures data showed 25 out of 31 fixtures from the region in September were East Asia-bound and 23 out of 27 in October.
Meanwhile, Indian demand has been firm through the year, keeping many vessels occupied, the shipping source said, noting also some uncertainty around the timing of vessels’ return voyages to the Persian Gulf..
Indian charterers accounted for four fixtures in October and six in September, according to Bhushan.
Shiptracking data show India’s LPG imports rose to 1.7 million mt in October, from 1.5 million mt in September.
But Bhushan said Indian charterers’ demand could ease up amid congestion reported at almost all major ports, with delays of a couple of days at Sikka and Mundra, five to six days at Dahej, nine to 10 days at Vizag, and seven to nine days at Haldia.
On top of this, Panama Canal transit delays of around 17 days southbound and 12-19 days northbound are creating further uncertainty over vessels coming from the US Gulf Coast, although sources said this was not a major factor propelling Middle East VLGC rates as owners and trader relets could head for the US or Middle East, with both markets currently being strong.
In terms of new tonnage coming on to the market, seven more VLGCs are lined up for delivery during the rest of 2022 and another 45 next year, to add to the global VLGC fleet of 334 vessels.
A total of 12 VLGCs have been delivered over January-October 2022, helping to cap freight rates, but Poten expects some newbuild slippages during the rest of 2022 and 2023, which should dampen “the downside impact of high tonnage supply on freight markets,” Bhushan said.
The first source said: “We do hear some of the newbuilds are being pushed later into to 2023, especially from China as yards had issues with COVID-19, hence delays in delivery next year.”
The list of VLGCs sent for drydocking this year is not as long as over 2020-2021 and should not have much impact, according to Bhushan.
Bhushan said the market would be monitoring how many days vessels are due to be out of active trade to prepare for next year’s EEXI/CII compliance, or Energy Efficiency Existing Ship Index/Carbon Intensity Indicator, especially for those ships delivered before July 2015.
CII compliance may prompt slow-steaming by pre-July 2015 delivered vessels, tightening tonnage and supporting rates, he added.
Consultancy FGE Energy said in a report that all new VLGCs ordered since 2021 will to be powered by LPG dual-fuel, while owners with older vessels might consider engine retrofits to boost carbon efficiency should the EEXI requirements be unattainable by other methods.
BW LPG has been the leader in retrofitting older ships with LPG propulsion and more shipowners have decided to retrofit for dual LPG use, including China’s Tianjin Southwest Maritime.
The first shipping source said December was likely to be as active as the last few months and that the market could stay strong through Q1 and Q2 of 2023 if there is a harsh winter in East Asia.
“The VLGC market is expected to carry the momentum in the coming one to three weeks, as we see several uncovered cargoes in the Middle East and a tight US market,” Bhushan said, adding that owners and operators appear to be holding firm positions in a bullish mood even if there are signs that Japanese and South Korean inquiries easing on ample stocks and lower use of LPG as cracker feedstock.