29 March 2024
Spliced together: LNG shipping and portfolio management
Publication date: 01 July 2020
Gas Strategies Group
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The outlook for the LNG shipping market was boosted in early June by the signing of a huge newbuild vessel order by Qatar [1] – lifting a sector which had been floating in the doldrums, with new orders lower in recent years. This has prompted us to consider the current shipping fleet, along with the existing order book, to form a forward looking view of the sector, both in the context of the wider LNG market – specifically shipping length versus liquefaction capacity – and the key issues which face shipping charterers and owners in the coming months and years.
Our analysis of the existing LNG fleet and orderbook[1], combined with our view of future liquefaction capacity[2] shows there is ample length in the shipping market out to at least the mid-2020s (see Figure 1). Given new deliveries expected over the next four years will arrive at time of relatively little new liquefaction capacity coming online, the implied fleet utilisation[3] could fall to around 75% until 2024, down from 84% in 2019[4]. This suggests that current low spot charter rates (see Figure 2) may prevail until at least the middle of this decade.
[2]Source: Gas Strategies, GIIGNL
Too much of a good thing
A major headwind being experienced by the shipping market is that the LNG market it serves is fundamentally oversupplied. Weaker than anticipated demand growth – exacerbated by COVID-19 and coupled with record liquefaction capacity additions over the past 18 months – has led to the previously unprecedented market situation of today: multi-decade low commodity prices and LNG not being lifted by those with high cost capacity rights at US projects [3].
While the mass cancellation of cargoes by buyers is a recent phenomenon, a further issue is that many US LNG FOB offtakers commissioned ships based on the expectation that there would be a significant flow of LNG volumes from the US to Asian markets. However, with lower than expected LNG prices in Asia, the economics of such trade has become less attractive. This led to only 37% of US volumes being shipped to Asian markets in 2019 – with 38% and 21% of volumes shipped to Europe and the Americas respectively. This compares with 52% of US exports delivering to Asian countries in 2018, while 13% headed to Europe and 28% to other countries in the Americas.
This change in flows directly impacts the shipping market by significantly reducing the average round trip of vessels in the global fleet and in turn increasing the total tons of LNG a vessel may transport in a given period.
[4]Source: Reuters Eikon, Gas Strategies
All pain, little gain
Participants across the LNG shipping industry have felt the pain of low commodity prices. With regards to medium- to long-term charters, which constitute the majority of deals in the LNG ship space, companies which have surplus shipping capacity have no respite by sub-chartering their vessels on the spot market. And ship owners with vessels coming off charter in the current environment will face a significant challenge to lock-in new mid-term or long-term charters at favourable rates.This all leads to some key questions facing participants in LNG shipping:
Conclusion
The LNG shipping sector is starting to follow the broader LNG market in becoming increasingly commoditised, with lower margins to play for. There is growing potential for refinancing pressures to boil over as initial charter periods end and securing favourable rates on new charters – with balloon payments looming – becomes ever more challenging.
This could lead to a consolidation among shipping companies leaving those with the larger and more diverse portfolios with greater purchasing power at shipyards, better access to favourable financing terms and more competitive in targeting the reduced number and lower charter rate opportunities when they arise. Instead of entering a period of opportunity for new entrants and diversity in the LNG shipping sector, we could instead see the big players with their own portfolios thrive and take even more market share, with the implication that smaller and weaker players risk being cast adrift.
There also remains significant risk for LNG players – even the big fish – to feel further pain in addition to the current low commodity prices if they are unable to renegotiate charter rates or their shipping strategy does not properly compliment their LNG portfolio management.
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Please contact us [6] directly to find out more about the assumptions we have used in the analysis behind this blog (including liquefaction capacity build out, ship orders and calculations of fleet utilisation). We are delighted to discuss these topics with you, along with our insights on the shipping sector, wider LNG market and LNG integrated portfolio management and optimisation.