LPG: Light at the end of the tunnel

Part of the Lloyd's List Outlook special report:

LNG Outlook 18: Sweet mix of supply-demand fundamentals

Product Outlook 18: Bulls are arriving... hopefully

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CAUTIOUS optimism is lingering over the liquefied petroleum gas shipping market as a greater sense of balance is leading the industry to whisper about an imminent upturn in freight rates in 2018.

Seaborne LPG trades are expected to show a compound annual growth rate of 8%, up from 64m tonnes in 2013 to 94m tonnes in 2018, data from Epic Gas shows. Supporting the robust LPG demand will be the rapidly urbanising populations in two of the world’s largest economies — India and China. 

At the same time, US exports are capturing a growing share of the incremental demand for LPG, adding to the overall tonne-mile demand.

However, the demand story was just little more than a crutch for the sector in 2017, as vessel oversupply stifled the market, pushing freight rates to multi-year lows.

Read more from Lloyd's List Outlook 2018

In 2018, however, falling vessel supply fits in well with the outlook for demand for owners.

The latest orderbook schedule from Clarksons shows the rate of growth in aggregate cu m capacity of the global LPG fleet to fall from an annual growth rate of 16% in 2015 and 17% in 2016 to just 10% and 4% in 2017 and 2018 respectively.

LPG shipping is nearing the end of its hangover amid the emergence of US LPG exports, JP Morgan said in a report, adding that materially slower growth of the VLGC fleet — which accounts for over 65% of the total capacity in operation — will begin to tighten the market in 2018. Given the dynamic demand situation, the bank sees this sector as having potential for high reward.

According to Lloyd’s List’s annual survey of forecast freight earnings, VLGCs would earn around $18,550 per day in 2018, an improvement of 25.6% compared with this year’s average.

Opportunities

US output and pipeline expansion. US expansion of LPG production and logistics capability is to continue driving shipping demand forward.

Wood Mackenzie has predicted US LPG production to experience healthy growth next year amid rising shale production, with propane output from gas plants increasing to 150,000 barrels per day.

Based on government data, BW LPG estimated US production would amount to 82.4m tonnes in 2018 compared with 78.6m tonnes this year.

On the logistics side, Energy Transfer Partners’ Mariner East 2 pipeline project could be a potential game changer.

The 275,000-bpd pipeline, due to come online in the second quarter of 2018, will transport natural gas liquids from the Marcellus and Utica Shales areas in Western Pennsylvania, West Virginia and Eastern Ohio to destinations including the Marcus Hook terminal in Pennsylvania.

With storage at Marcus Hook limited, LPG would need to be exported once transported there, Stifel said. There should be “an inelastic increase of exports” that will translate into 3%-4% increase in global LPG trade, and handysize LPG tankers could be the main beneficiaries, it said.

Easing vessel oversupply. Banchero Costa’s head of research Ralph Leszczynski expects overall net fleet growth to be just 2% in 2018, against an increase in tonne-mile demand of at least 5%-6% next year. For that reason, Mr Leszczynski strongly believes that the spot market should start improving next year.

Data from Clarksons shows overcapacity could ease in the VLGC segment, with a slower pace of newbuilding deliveries. The number of VLGCs trading in this segment increased from 240 vessels at end-2016 to 259 at end-October, and is expected to be around 273 by end-2018.

For the segment of vessels of 25,000 cu m or smaller, a total of 17 more vessels with 231,109 cu m, or less than 4% of existing fleet, are expected to enter trading in 2018.

There is also some scrapping potential, especially in view of the upcoming new International Maritime Organization ballast water management and bunker regulations.

Avance Gas president Christian Anderson told Lloyd’s List that there is likely to be increased recycling of older tonnage as more investments are needed to keep those ships trading.

“Voyage costs are bound to increase from 2020 as bunker costs will increase and some owners will take this cost by installing scrubbers,” he said.

Generally speaking, owners with a fourth or fifth special survey between 2018-2020 and beyond will have to consider all options when it comes to complying with current and future environmental legislation, Fearnleys analyst Martin Kjendlie said.

Indian demand. Much of the growth for LPG in recent years has come from India, where LPG is substituting biomass as a household fuel as the country’s rural population urbanises by the millions every year.

Latest data from Clarksons showed India’s seaborne LPG imports rose 10% to 8.6m tonnes in 2016, making it the world’s number three importer. The country only imported 4.3m tonnes in 2011.

In India’s residential sector, traditional biomass still accounts for around 70% of total energy use, Wood Mackenzie said. Therefore there remains large potential for switching to LPG as average household income rises. 

LPG as marine fuel. A more long-term development that could spur huge demand is the attempts to use LPG as maritime fuel.

In September, Dorian LPG announced it would conduct an in-depth cost-benefit analysis of using LPG to meet the new global emissions standards with American Bureau of Shipping.

Astomos Energy has also signed Memoranda of Understanding with Statoil, Australian LPG marketer and distributor Elgas and Kuwait Petroleum Corp to explore ways to use LPG as marine bunker fuel.

However, Mr Anderson says that the industry still need some technical developments before an LPG-fuelled ship is 100% tier III compatible.

Risks

China-related shipping demand. Owners that are betting big on China’s rising demand could face headwinds in 2018, with likely less propane dehydrogenation capacity coming online in the country and its preference for Middle Eastern barrels.

In large part due to requirements from rising PDH capacity, China’s seaborne imports grew to 15.9m tonnes in 2016 from 3.4m tonnes in 2011. BW LPG data showed import growths remained strong in the first half of 2017.

But there are limited new PDH projects starting up in 2018, with one or two units starting up near the end of 2018—so the impact on LPG demand will be reflected mainly in 2019, Wood Mackenzie said.

China’s eight PDH plants, which have been commissioned from 2013 to now, can consume 5.5m tonnes of propane per annum when running at full capacity, figures from Sinopec and Platts suggested. Industry estimates showed that two Chinese PDH plants owned by Fujian Meide and Hengli Petrochemical, which can use up to 1.3m tonnes of LPG, could come online in the latter part of 2018 but delays are possible.

Also, Wood Mackenzie expects China to source propane primarily from the Middle East and said that “US cargo will be the second propane source for China's PDH production”.

The pricing advantage of US propane has weakened against Middle Eastern cargoes in recent months, curbing longhaul arbitrage shipments. While Middle Eastern producers tend to set their prices based on Asian demand, the US prices are mainly determined by domestic demand.

“We do expect the US trade to Asia to be ‘volatile’ during next year,” Mr Andersen said, citing price differentials between regions will be key.

Toss-ups. The expanded Panama Canal has been popular in the LPG shipping industry since its commercial operation began in 2016, but congestion is a major issue.

The cargoes and vessels tracker Kpler recorded a monthly average of 37 LPG carriers passing through the canal southbound this year, compared with 22 vessels in 2016. However, the use by VLGCs has been on a downward trend.

In January-May, a monthly average of 30 VLGCs were recorded, compared with 20 VLGCs in June-October. “Slot availability is currently proving a challenge,” Kpler said.

Other market participants also noted the difficulty in booking northbound transits for ballast voyages from the Pacific.

“Although the Panama Canal is increasing its capacity, I think the VLGC market will continue to struggle with booking slots,” Mr Andersen said. “The main reason being that VLGC trading is basically a 100% spot market, difficult to be planned long time ahead.”

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