The order book for very large gas carriers (VLGCs) is significant this year, when compared with the number of deliveries over recent years, and there are concerns from the market that the large number of arrivals will depress global freight rates. But there are a few factors in play that could help offset the impact of the large newbuild list.
The global VLGC fleet is scheduled to grow by around 14pc – or 46 newbuilds – to approximately 380 vessels this year, an influx that poses a great risk to freight rates and utilisation, according to Oslo listed shipowners Avance Gas and BW LPG.
Newbuild numbers have not been this strong since 2015 and 2016, when 35 and 44 VLGCs were delivered, respectively. During those years, freight rates globally came under pressure. The Ras Tanura-Chiba VLGC rate fell from a high of $137.50/t on 16 July 2015 to a low of $18.50/t on 7 September 2016. Similarly on the Houston-Chiba VLGC rate, the assessment peaked at $290/t on 1 July 2015 before bottoming out at $43/t on 21 September 2016.
The number of newbuild deliveries in 2015-2016 is similar to what is expected in 2023, but market dynamics have changed significantly since then. Deliveries in 2015-2016 made up nearly 20pc of the total global fleet, compared with around 14pc in 2023. And other factors are also in play that could help dilute the impact of a high newbuild year.
Dry docking and regulations
The introduction of emissions regulations in the shipping sector this year are anticipated to tighten vessel availability. The International Maritime Organisation’s Energy Efficiency Existing Ship Index (EEXI) and Carbon Intensity Indicator (CII) regulations came into effect on 1 January and forced older ships to reduce their speed to comply. This will lengthen voyages and prolong periods of employment. VLGC supply could fall by 1.5-2pc owing to reduced vessel speeds and more vessels being taken off the market for retrofitting, according to Avance Gas.
A 20pc reduction in speed will decrease emissions by 50pc, but slow steaming will decrease the available tonne days from the fleet, Argus Consulting data show. The average speed of the VLGC fleet fell by 4pc on the year in 2022, Avance Gas data show.
The IMO’s regulations have the largest impact on older ships, which tend to be the least efficient and most polluting. By the end of the year, there will be 19 VLGCs that are 30-years old and above, BW LPG says. Pent-up demand for scrapping in the VLGC sector will also be a key factor to watch, with 15pc of the fleet being older than 20-years old.
Another consequence of EEXI and CII will be an increase in dry docking, as ships are forced into retrofitting to meet the more stringent standards. Retrofitting a VLGC costs $8-9mn, while it costs 10 times more to order a newbuild with the same technology, according to BW LPG.
Dry docking is expected to be exceptionally strong this year, with data suggesting that 62-76 vessels will enter dry docking in 2023. Vessels typically go into dry docking every five years, so vessels built in 2008, 2013 an 2018 are now due. There were 27 VLGCs built in 2008, 12 in 2013 and 10 in 2018.
VLGC export demand is expected to further increase in 2023, bringing about a rise in tonne mileage, particularly from the US Gulf. US government agency the EIA is anticipating a 16pc rise in exports, enabled by a 4pc growth in production and a 4pc decline in domestic demand. Additionally, inventory levels are currently trending 25pc above the 10-year average.
BW LPG are expecting VLGC exports from North America to grow by 18.5pc on the year to around 53mn t in 2023, and VLGC exports from the Middle East are anticipated to grow by 1.2pc to 37mn t.
One of the big drivers of this expected growth is Chinese propane dehydrogenation (PDH) plants starting up again after Beijing lifted its Covid-19 lockdowns. Chinese PDH consumption declined throughout 2022, averaging 75pc compared with 87pc in 2021, aligning with the decline in operating margins. These low margins have pushed some new PDH unit start-ups from 2022 into 2023, with the economics offering little in the way of incentives.
But as China emerges from its Covid-19 lockdowns, there is scope for an improvement in operation levels at PDH facilities. Around 9.7mn t/yr of propane demand from 12 new PDH plants is expected to come on line in China this year.
The increase in US LPG exports, largely from the US Gulf coast to Asia-Pacific, brings a volatile player into the VLGC market — the Panama Canal. Delays at the canal can have a profound impact on global VLGC freight rates and make it difficult to schedule ships for voyages.
The implementation of a new booking system at the Panama Canal in 2021 meant that VLGCs were no longer eligible for period 1 transit slots — which can be booked up to a year in advance. VLGCs can now only apply for period 2 or 3 transit slots, which can be booked up to 21 days in advance of transit if using the Panamax locks, and up to 14 days for Neopanamax locks. As a result, delays have become more volatile and auction fees have increased for VLGCs.
Panama Canal congestion in the fourth quarter last year caused the rates for auctioned transit slots to surge, with four VLGCs having to pay in excess of $2mn, according to data from Panama Canal shipping agency Boyd Steamship. The highest fee paid at the auction was $2.6mn on 29 November.
The volatility of delays at the Panama Canal combined with higher auction fees are incentivising shipowners to route ships via the Cape of Good Hope or through the Suez Canal to meet laycans,
adding to global VLGC tonne mileage and adding to the inefficiencies.
VLGCs recorded 625.9bn tonne miles (tmi) last year, compared with 579.8bn tmi in 2021 and 527.54bn tmi in 2020, according to data from oil analytics firm Vortexa.
The large number of VLGC newbuild deliveries this year is likely to increase the pressure on freight rates and utilisation, but the impact could be diluted by the combination of vessel inefficiencies derived from dry docking, longer voyages as ships slow to comply with new emissions regulations, and increasing congestion at the Panama Canal.
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