For the owners of oil tankers and dry bulk carriers, this is a painful period. But there are also some bright spots in the haze of the maritime industry-not only the container industry is booming, but the freight rate of liquefied petroleum gas (LPG) has just reached the highest point in 5 years.
Last Friday, the Baltic Exchange assessed the freight of a very large gas carrier (VLGC, an LPG carrier with a capacity of approximately 84,000 cubic meters) at US$104,000 per day. This figure has risen from a low of less than $20,000 per day in July.
Last Wednesday, Argus carried out a higher assessment of VLGC freight rates on the Middle East-Asia route: US$107,000 per day.
The stocks of VLGC owners are rising. In the past six months, the two Norwegian companies Avance Gas (Oslo: AGAS) and BW LPG (Oslo: BWLPG) have grown by 110% and 88%, respectively. Dorian LPG (NYSE: LPG), which is listed in the United States, is lagging, although it has grown by 44% during this period.
In order to gain insight into the factors that led to the increase in VLGC freight rates and whether the freight rebound has an impact , FreightWaves interviewed Scott Gray, an LPG freight broker located in Texas.
Gray is known in the industry as one of the co-founders of Waterborne Reports, a well-respected natural gas transportation intelligence company that was subsequently acquired by IHS Markit (NYSE:INFO).
U.S. exports unexpectedly rise
LPG (propane and butane) is produced through oil and gas production and refining processes. When the impact of the epidemic cut consumption in the first half of the year and oil prices plummeted, people worried that LPG transportation would be a terrible situation.
Theoretically, the lower U.S. production combined with the sharp decline in refinery output will reduce U.S. LPG exports. There are two main factors affecting VLGC freight: US-Asia and Middle East-Asia traffic. As the U.S.-Asia voyage is longer, the rate is more important. Therefore, U.S. LPG exports restricted by the epidemic will limit the spot price of VLGC.
But the facts have proved that concerns about US exports are unfounded.
Gray explained: "I want to say that the U.S. water LPG exports have not been affected by various sporadic events in the first and second quarters. If you look at the export graph, the graph will fluctuate, but it has a downward trend. Not big. In fact, I can even say that the average in the fourth quarter is better than the previous three quarters. We see 80, 82, 84 VLGC loading every month. I think this is a powerful system."
Gray said that unlike LPG in the Middle East (more from the refining process), LPG in the United States is produced through natural gas production. After the new crown epidemic, natural gas production has performed better than oil production and refining.
In BW LPG's latest quarterly conference call, CEO Anders Onarheim said: "Despite the decline in oil production, the U.S. LPG production has increased." Executive Vice President of Business, BW LPG Niels Rigault added: “The production of LPG in the US has proven to be more resilient in a low-price environment.”
Far East demand is very strong
VLGC's listed companies have highlighted the strong demand for Asia from China, Japan and South Korea in recent months. In Asia, propane is used for heating and cooking and plastic production.
On the industrial side, LPG is consumed by propane dehydrogenation (PDH) plants. Some PDH plants only use propane as a raw material; others choose to use propane or naphtha based on price. In layman's terms, the propylene produced by the PDH plant is the precursor of polypropylene, and propylene is the precursor of plastic.
Considering the plastic packaging of all commodities used after the epidemic, the price of propylene is soaring. What followed was the pricing of propane in China. The value of propylene is at or close to a record level.
The greater the spread between US propane and Chinese propane, the higher the transportation cost, while still providing shippers with acceptable sales margins.
"This (Asian) demand keeps prices high. Gray said that when the price difference (priced with the United States) increases, the shipping industry will step in and get a share of the pie, which is why freight rates are now rising sharply.
Middle East exports and India imports
The transportation needs of LPG must be considered in conjunction with the export situation of the Middle East and the United States.
Due to the impact of the epidemic that has led to OPEC production cuts and refineries, the impact of COVID on Middle East exports is greater than US exports.
Gray confirmed: “Due to reduced refinery operations, production in the Middle East has decreased. Iran’s transaction volume has also declined. In January, Iran’s production was approximately 575,000 tons. In November it was 250,000 tons.”
A key development in global shipping demand is the increase in India's imports of American LPG, rather than imports from the Middle East.
Rigault said: “India started importing from the United States last year. The duration of the voyage is more than four times the duration of the Middle East voyage. India mainly buys LPG from the Middle East. But they also see the US price, so they can also buy American products.”
Gray is skeptical of the US-India trade that started in early 2019. "This is considered a new thing. A new route. But the Middle East market seems to have taken back part of it. They said'Don't be in my backyard' because it is next door. It is difficult for the United States to compete with long-distance freight in the Middle East on the basis of However, the Middle East can ship it to the United States. In addition, Indians also have contracts in the Middle East. For us, this is more opportunity."
Canal and dry dock supply restrictions
The two main constraints on ship supply: the congestion of the Panama Canal and the maintenance and modification of dry docks for LPG ships are also increasing freight rates.
As previously reported by FreightWaves, in the past two months, the speed of ships without transit reservations through the Panama Canal has slowed. Gray said: "We have seen that due to delays, the volume of shipments from the United States to Asia via the Cape of Good Hope has increased, which has led to an increase in freight rates."
The most important ship supply issue involves dry docks.
He pointed out: “There are currently 25-30 LPG ships in dry docks in Asia in need of repairs. I think about five years ago: all the newbuildings came in. Now, after five years, it’s like you bought one. The car must be brought in, and the boat must be maintained. All these people will go to the yard at the same time, thus tightening the market."
Outlook for the first quarter of 2021
How long can VLGC freight rate maintain the current high point?
In terms of dry dock, the freight tailwind will continue. Gray said: "In the first quarter, there were almost as many ships in dry dock as in the fourth quarter." According to Rigault, "23% of the global VLGC fleet will enter the dock next year."
In terms of freight, the volume in the Middle East may increase. OPEC plans to cut production in January. Gray certainly said: "It will have an impact at some point."
At the same time, Biden will assume the presidency on January 20. It is expected that Biden's attitude towards Iran will not be as tough as Trump. This may eventually increase Iran’s LPG exports.
The biggest unknown is the arbitrage spread between China and the US LPG, which will determine the volume of transactions on this long-distance route.
In terms of weather, if the weather in the United States is cold, the domestic demand for LPG heating will increase, but the warm weather in North Asia will reduce the demand, the price difference will be reduced, and the goods will be reduced. vice versa.
