LNG: Sweet mix of supply-demand fundamentals

Part of the Lloyd's List Outlook special report:

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DEMAND for shipping liquefied natural gas is set to continue its rapid growth path, leading to much higher spot earnings for shipowners in the coming year.

Driving that is an increase in average shipping distances as more LNG is exported from the US to markets in Asia, while the ramp up of export projects around the world will lead to a vessel supply tightness as demand outpaces fleet growth.

Average earnings for 150,000 cu m-180,000 cu m vessels are expected to climb to $55,429 per day in 2018, according to a Lloyd's List survey. That compares with $40,138 in 2017 and $29,055 the year before.

China, the world's largest energy consumer that is seeking to use more clean fuel, could overtake South Korea as the world's second-largest LNG importer as early as next year, according to the US Energy Information Administration. By 2040, China may well be on the road to importing 11bn cu ft per day, on par with Japan, currently the largest importer, the EIA said.

This year LNG trade has grown 12% while the fleet has only expanded 7.5%. And that promising balance looks set to continue - DNB has projected volume growth of 38% to 365m tonnes compared with fleet expansion of 27% between 2016 and 2019.

Sharing similar sentiments over such a sweet mix, Jefferies finds the near-term and longer-term outlook for LNG carriers quite attractive.

Four new projects are expected to start operations by the end of 2017, with a total annual production capacity of 20.9m tonnes at full throttle. That would require an extra 23 LNG carriers, according to Stifel estimates.

The Chevron-led Wheatstone project in Australia shipped its first cargo in October ahead of a pick-up in winter demand.

Other projects that are close to starting include Cheniere's Sabine Pass train 4 and Dominion Energy's Cove Point train 1 in the US, Gazprom's Yamal train 1 in the Russian Arctic, and Golar LNG's floating liquefaction vessel Hilli Episeyo off Cameroon.

Already, spot charter rates for 160,000 cu m vessels have moved up to $60,000 per day as of early November, double the figure at the start of the year. Rates could head higher as even more output hits the market, according to Clarksons.

Looking further ahead, the US is expected to be a major supporting factor in terms of both export volume and shipping distance.

By 2018, the US will have more than 20m tonnes per year commissioned, with another 40m tonnes per year under construction by 2020, Clarksons said in a research report.

Elsewhere, DNB forecasts a 48% rise in tonne-miles in the period from 2016 to 2019, in part owing to a 7% increase in average sailing distances amid rising US exports. Last year, the shipping distance between Australia and the Far East was on average 3,626 nautical miles, while US exports travelled 6,731 miles, it said.

On the demand side, China remains the growth driver, said Clarksons, with imports up 22% this year to October after growing by 34% in 2016.  
Other notable demand centres include Pakistan, Bangladesh, the Philippines, Thailand and Myanmar, Drewry analysis showed, with combined requirements of 32m tonnes in 2020, creating employment for some 25 to 30 LNG vessels.

At a shipping event in London in September, owners and operators expected the market to be short of 30 to 40 vessels overall by the end of the decade.
Financing and technology may dampen the long-term growth prospects, while near-term fleet expansion remains large.

DNB is expecting fleet growth of 9.9% in 2018, falling to 7% in 2019, and 4.6% in 2020.

The orderbook stood at 98 conventional LNG carriers as of early November, according to Clarksons data, which was 24% of the existing fleet. But that ratio is declining because few new orders have been placed since the end of 2015.
While the market is in need of additional LNG carriers, significant investments are naturally required but financing is hard to come by.

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