While freight rates to haul LPG on very large gas carriers (VLGCs) continue to exceed USD100 per tonne, this situation is untenable.
IHS Energy’s Waterborne Commodity Intelligence, which tracks seaborne LPG movements, said in a recent report that congestion in Indian ports, especially Haldia, has shrunk tonnage availability for the east-of-Suez market, causing inflated rates.
The report said, “This has introduced an increased level of uncertainty into shipowners’ calculations for how long future voyages will take. Plainly, longer delays inflate owners’ rate expectations for future voyages, buoying spot rates.”
While this may sound like good news for owners, the high freight costs would deter LPG trade.
On 21 May, Gulf-Asia Pacific rates averaged USD111.625/tonne on the Baltic Exchange, up from USD105.125/tonne a week ago. That works out to daily earnings of USD108,912 at current bunker prices in Fujairah.
The Waterborne report said, “Further, since current product pricing dynamics cannot support freight at today’s levels, traders are incentivised to cancel their liftings, relet their tonnage, and make a swift, risk-free return. Such transactions would at least begin to establish a ceiling for freight rates and, probably, begin a turnaround in freight rates.”
The substantial VLGC orderbook also presents downward pressure on freight rates.
IHS Maritime’s Sea-web.com data show that 37 VLGCs are due to be delivered in 2015. “Current freight levels seem unlikely to persist. This wave of new ships should provide greater liquidity to the tight shipping market, at the very least, and should provide downward pressure on rates,” said the Waterborne report.
Finally, there remains the question of just how the drop in oil prices over the past year will affect US production – and, by extension, cargo availability.
“If the expected surge in US export volumes is held back by decreases in production growth, then the greatly expanded VLGC fleet would find itself fighting over a smaller number of liftings, providing serious downward pressure on freight rates,” said the Waterborne report.