Global LPG Outlook – 2018

By  Baibhav Mishra

(Image Courtesy: Marine Traffic)

Even as the LPG shipping market is witnessing a depression affected by oversupply of transport vessels, the projection for demand of seaborne LPG trade appears impressive. This growth will turn the market from oversupplied to very tight within the next 12 to 18 months. Investors will soon have an opportunity to generate outsized returns through 2018 and 2019.

LPG shippers expect a better freight market in 2018 than in 2017, and are not willing to make any new long term contracts below USD 20,000 per day for very large gas carriers (VLGC).

The VLGC freight market has been weak in 2017 due to numerous newbuildings entering the market after VLGC rates peaked above USD 100,000 per day in 2015 as compared to the current levels of approximately USD 12 to 13,000 per day in the spot market.

Operating Cost of Vessels in 2018

Vessel operating costs are expected to rise in 2018 with repairs and maintenance and spares – which are likely to increase most significantly in each of the next two years. Key players in the international shipping industry, predominantly shipowners and managers in Europe and Asia have predicted that vessel operating costs are likely to rise by 2.4 per cent in 2018.

The cost of repairs and maintenance is expected to increase by 2.0 per cent in 2018, while expenditure on spares is predicted to rise by 1.9 per cent. Drydocking expenditure, meanwhile, is expected to increase by 1.8 per cent in 2018.

The outlay on crew wages is expected to increase by 1.7 per cent with other crew costs thought likely to go up by 1.5 per cent in 2018. The increase in expenditure for lubricants is expected to be 1.6 per cent in 2018. Meanwhile, projected increases in stores are 1.7 per cent in the two years under review, while management fees are expected to rise by 1.0 per cent in 2018.

The cost of hull and machinery insurance is predicted to rise by 1.0 per cent in 2018 while for  P&I insurance the projected increase is 1.1 per cent. The predicted overall cost increases were highest in the offshore sector, where they averaged 3.8 per cent in 2018.

Market Volatility & Charter Rates

Though the sentiment for 2018 is more positive than 2017, a coarse Q3, 2017 has been a tough quarter, which creates some short-term uncertainty. While the shipping companies dealing with LPG transport are fix vessels at a time charter rate of about USD 20,000 per day for 1 year, they are not extending the duration of the contracts due to expectations of an improved market.

Currently, 29 VLGC vessels are under order out of a global fleet of 259 ships while 19 vessels have been delivered in 2017. The industry is expecting to see a net fleet growth of VLGCs of 3 per cent over the next two years.

At the time, LPG production growth is expected to grow around 6 per cent, driven by strong growth in the United States.

Region-wise Growth of LPG Market

In 2018, the geographically widespread growth of LPG production from fractionation will gradually begin to pull the market out of deficit. Year-on-year declines in global LPG stocks have continued into the fourth quarter of this year, driving up propane and butane’s prices relative to naphtha. These price shifts have priced some petrochemical demand for LPG, including propane use for PDH units, out of the market.

The Global LPG one-year outlook describes how growth of LPG supply from fractionation will accelerate, bringing supply and demand back into alignment. Iran’s South Pars, Qatar’s Barzan, and Australia’s LNG projects will contribute to growth next year.

In 2017, global supply from fractionation increased by a meagre 60,000 b/d. Supported by widespread growth outside North America, supply from fractionation will grow 300,000 b/d in 2018. As supply growth accelerates, bullish propane and butane prices will tame petrochemical demand. The year-on-year decline in global LPG inventories is expected to slow or come to a halt by the end of 2018.

Industry’s Version

“Outside North America, there have been no bright spots for LPG supply growth in 2017. Even South Pars, the one place outside North America where we anticipated new supply, failed to deliver,” said Andrew Reed of ESAI Energy.

At the end of 2017 and in early 2018, new supply from South Pars and other projects will begin to have an impact. Between continued growth in North America and renewed growth elsewhere, the market will gradually rebalance, he added.

Among the different size categories of LPG ships, the small vessel segment is expected to be the best performer in 2018 while Handysize vessels will be the worst, according to the latest edition of the LPG Forecaster, published by global shipping consultancy Drewry.

The fact that the LPG shipping market is oversupplied with vessels (with the exception of the small segment 1,000-5,000 cbm), as a result of strong fleet growth during the last three years, cannot be challenged.

The global LPG fleet expanded at an annual average rate of 17 per cent in 2015 and 2016, and was expected to grow by nine per cent in 2017. However, shipowners can now breathe a sigh of relief as fleet growth is set to slow down to five per cent in 2018 and three per cent in 2019, respectively. This will be a positive sign for the global LPG shipping market in the next 12 months.

Sea News Feature, December 20

Link : http://seanews.co.uk/global-lpg-outlook-2018/