10 January 2018:
by Michael Tusiani
There is little doubt that LNG freight rates in 2018 will reach higher average levels than in recent years. That is welcome relief to shipowners, who have been operating under stress during this depressed period.
At Poten & Partners, we project the global LNG market will continue to grow from 292 million tonnes in 2017 to more than 360 million tonnes by the end of the decade.
Several underlying changes in the market support this prediction.
Firstly, global LNG demand remains firm, with strong growth in key markets, especially China and India. In particular, China had a stellar performance in 2017, recording a 45% increase in LNG imports compared with the previous year.
Next, additional supply will be produced in facilities that are currently under construction or preparing to begin operation; at today’s prices, this LNG will easily find a home. As of today, more than 90 million tonnes per year of production capacity is under construction worldwide, 50 million tonnes of it in the US. As more and more US exports move to the major markets of the Pacific Basin, vessel tonne miles will inevitably increase. Over the longer term, these volumes will not be able to be transported by the existing modern fleet, including vessels on the current orderbook.
The third factor is that some US Gulf to Pacific cargoes may not be able to be transported via the Panama Canal, as most analysts originally contemplated, because of congestion. Alternative trade routes to the Pacific Basin will further increase tonne-mile demand. In our view, by 2020, Pacific Basin markets will require more than 35 million tonnes per year from the US to balance their projected LNG import requirements.
In addition, trade routes and the destination of cargoes are becoming increasingly uncertain, particularly from the new US projects. LNG participants will require sufficient shipping capacity to ensure cargo liftings, while being able to take advantage of arbitrage opportunities as they arise. The key requirement of buyers around the world, particularly those in the high-growth Asian markets, has become destination flexibility.
Also, a growing number of legacy LNG sales agreements and the associated shipping between long-established producers and their buyers are approaching maturity. As this LNG is recontracted, a shift seems likely towards more modern, efficient tonnage and the continuing retirement of older, steam-propelled vessels.
Lastly, seasonality may become more pronounced, as we are now experiencing in China, leading to higher winter LNG import demand. In the final quarter of 2017, China imported about 13 million tonnes, a 55% increase over the same period in 2016. This was the result of an aggressive drive by the government to replace coal with natural gas for winter heating in the residential and commercial sectors to improve air quality in the north.
Until China develops its infrastructure, particularly for LNG and natural-gas storage, this seasonal call for LNG will probably continue unabated. As a result, charterers might be persuaded to commit to a vessel for longer periods rather than depend on its availability in the winter spot market.
In conclusion, average annual charter rates, especially for the most fuel-efficient ships, are likely to increase significantly.
Hopefully, the several uncommitted newbuildings entering the marketplace this year, and the continued availability of steam vessels, will not cause rates to rise to extremes.
Otherwise, the consequence will be the ordering of more ships, probably ensuring that the much-improved market is short lived.
This article was originally published on TradeWinds. Click here to read it from the original source.