Global LNG fleet in excess until 2022: Howe Robinson

A large carrier orderbook and limited scrappage, amid concerns on future tonnage demand, means that the global LNG fleet is set to remain in excess until 2022, shipbroker Howe Robinson said.

Ample freight supply to the LNG market could weigh on spot and term charter rates, despite expected increases in global liquefaction capacity, senior broker at Howe Robinson Debbie Turner said.

The LNG carrier orderbook has stretched to 135 vessels, Japanese shipping firm Mitsui OSK Lines (Mol) senior adviser Mike Rowley said, of which Mol has ordered 14. There are 538 carriers currently operational.

The number of ordered vessels without long-term charters attached is greater than 40, Turner said. This could increase vessel availability for spot and short-term charters in 2019-22, as the growth in global liquefaction capacity is expected to slow in 2020-23.

Lower costs and higher shipyard capacity

Low construction costs for LNG vessels and ample shipyard capacity are buoying the carrier orderbook, despite vessel capacities increasing, Turner said.

Construction costs for new LNG carriers are low, and could remain at current levels, she said, with shipyards appearing unwilling to reduce production.

The major South Korean shipyards are now able to build 23-25 LNG carriers each annually, according to Turner, with annual capacity at China's Hudong shipyard also increasing to 12 carriers from four.

It is unclear how the proposed merger of South Korean shipbuilders Hyundai Heavy Industries and Daewoo Shipbuilding and Marine Engineering will affect the country's construction capacity, she said, but noted that the firms are seeking to remain separate entities.

Shipbuilders and owners are moving towards an industrial standard capacity for new gas injection (two-stroke) LNG carriers of 174,000-180,000m³, Turner said, having done so for the smaller 160,000m³ dual-fuel and tri-fuel diesel-electric (DFDE and TFDE) vessels in 2013. But pricing for new vessels remains low despite this increase, she said.

Import projects an alternative to scrapping

Floating import projects may provide an alternative to scrapping for older vessels, Turner said.

LNG carrier scrapping remains low, Turner said, with many older steam turbine vessels remaining in service — a sentiment echoed by Rowley. But this could leave other alternatives open for these vessels, particularly as floating storage and regasification units (FSRUs) or floating storage units (FSUs) attached to LNG-to-power stations, both said. Mol has an established offshore division, which provides FSRUs and FSUs for regasification and power projects.

Taking these vessels off the spot charter market could support charter rates, but charterers seek two-stroke and then TFDE propulsion vessels first, market participants said, chartering steam turbine vessels as a last option.

Delayed US projects could curb tonnage demand

The ongoing US-China trade conflict could be creating issues with final investment decisions (FIDs) on planned US liquefaction projects, and could limit future freight tonnage demand, Turner said.

Chinese LNG demand is expected to significantly buoy global demand in the coming years. But prospective US operators could be unable to secure equity and supply agreements with Chinese firms to underpin the financing for their respective projects, with China's tariffs on US LNG at 25pc.

The location of the US relative to demand markets in the Atlantic and Pacific basins mean that US production has the highest freight tonnage demand. And expected increases in US liquefaction capacity would likely further drive global tonnage demand higher.

But if firms are unable to reach FIDs on these projects, the higher global tonnage demand would be unlikely to materialise.

Panamanian congestion

Trade flows between US liquefaction projects and northeast Asian demand markets is likely to lead to congestion at the Panama Canal, Turner said.

The passage has only three slots for LNG carriers and is unable to cope with increases in US liquefaction, she said, meaning that carriers unable to secure transit slots may have to wait for 2-3 days for a slot cancellation. Alternative passage via either the Cape of Good Hope or Cape Horn would require too many additional journey days.

But possible future tightness in the inter-basin arbitrage for spot US loadings could curb demand for Panama crossings, with firms seeking to instead take cargoes to Europe and other Atlantic basin markets. This arbitrage has held tight, with Europe holding the reference for US fob pricing, for much of 2019.

And demand for Panama crossings could be further curbed if FIDs on US exports projects are reached at a slower rate than expected, leading to slower growth in US liquefaction capacity.

Shorter term charter periods increasing risk

Term charter periods are shortening, which could lead to more joint ventures to mitigate the additional risk faced by shipowners, Rowley said.

Periods of 5-7 years work for other owners but Mol is looking to its offshore sector, which offers greater returns, Rowley said.

And more new vessels on the global orderbook without attached long-term charters could further lead to more spot and short-term charters, Turner said. Owners are likely to seek intermediary charters for short periods on these vessels before securing long-term charters for them, she said.

Next tranche of carrier orders from trading firms

The next tranche of LNG carrier orders is likely to come from trading firms, Turner said.

Trading firms often seek spot or short-term charters for LNG sourced on the spot market, according to market participants. This may mean that demand for spot charters could be curbed if these firms seek to increase their shipping capacity under term charters or direct ownership.