LNG freight rates plummet as sector grapples with glut of ships

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Constitution charges for ships carrying liquefied pure gasoline have hit document lows, with some house owners now dealing with a loss in the event that they lease their vessels out, because the sector grapples with big overproduction within the wake of Europe’s vitality disaster two years in the past.

The price of hiring a contemporary LNG service — the dominant vessel sort in the marketplace — on a short-term foundation within the Atlantic basin was on common $19,700 a day in November, in line with knowledge from Spark Commodities, the bottom assessed in knowledge going again to 2019.

Charges have fallen practically 80 per cent for the reason that summer time, because the supply of latest ships outpaces the expansion in international LNG manufacturing.

Brokers, analysts and LNG merchants stated that headline charges for older, much less environment friendly vessels had plunged as effectively. For the LNG carriers that run on steam generators, probably the most inefficient in the marketplace, “the earnings, as soon as components reminiscent of operational prices are deducted, are in loads of circumstances destructive or close to zero”, one dealer stated.

Such low charges imply some shipowners might not be capable to cowl their prices from letting their vessels out, and are prone to result in a interval of readjustment within the business, for example by the scrapping of older ships.

Unfavourable constitution charges for LNG carriers are uncommon however have been recorded by Spark in February 2022, within the run-up to Russia’s invasion of Ukraine. Gas prices, which Spark assumes the shipowners pay on the vessel’s ballast leg — when it isn’t carrying cargo — soared because of the imminent assault, resulting in destructive charges being assessed.

The autumn in constitution charges this yr has been pushed by the massive variety of vessels hitting the market at a time when the precise commodity they ship has not come on-line as rapidly as anticipated as a result of challenge delays.

Shipowners had positioned a significant number of orders in the course of the European vitality disaster triggered by the Russian invasion. They have been betting that demand for seaborne gasoline would rise, pushed by Europe’s want to switch misplaced Russian pipeline gasoline with LNG imports, because the Kremlin started slashing provides even earlier than the full-scale warfare started.

There have been round 650 LNG carriers in operation as of final yr, in line with Worldwide Fuel Union, an business group. Sixty-eight vessels would have been added to that pool by the tip of this yr and 88 in 2025, in line with Flex LNG, an LNG delivery firm. Greater than 80 ships can be delivered annually by to 2027, in line with Flex.

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Nevertheless, the extra volumes of LNG exports that these vessels wee ordered for haven’t materialised within the timeframe anticipated, primarily as a result of delays in the development of LNG export facilities in the US, now the world’s largest exporter of the superchilled gasoline and the primary supply for Europe.

LNG export volumes usually rise round 6 to eight per cent a yr, however this yr is prone to see just one per cent progress, stated Oystein Kalleklev, CEO of Flex LNG, on an earnings name in November. “That is additionally one of many explanations why the [freight] spot market is buying and selling poorly,” he stated.

Moreover, Europe has not imported as a lot LNG as in earlier years because of the excessive stage of gasoline left in storage after final winter proved milder than regular, limiting using such vessels.

Merchants additionally didn’t this yr utilise floating storage — protecting laden LNG vessels on the water till costs rise within the run-up to winter — as a lot as earlier years due to the shortage of a serious value distinction between summer time and winter costs. This has launched extra carriers.

Some older vessels are additionally being free of long-term contracts this yr, brokers say, including to the glut of ships.

Precise constitution offers at zero or destructive charges have thus far this time not taken place and stay theoretical for now, say brokers and analysts. Nevertheless, house owners of the older ships could also be inclined to lease them out at such charges — which might assist maintain their LNG storage tanks on the obligatory cool temperature — after weighing the prices of both taking them out of service or scrapping them.

“Actual constitution agreements might emerge the place house owners let loose a vessel at a headline charge of or near zero for a short while,” stated Clare Pennington, LNG delivery professional at commodity consultancy ICIS. “What might occur is a state of affairs the place some house owners are caught with a steam vessel and are balancing the price of [taking it off market] or letting it out so it doesn’t heat up.

“It should additionally depend upon how lengthy house owners might need to attend to scrap a vessel, and making calculations on what prices them much less,” she stated.

Whereas vitality firms forecast that demand for LNG will surge within the coming many years, principally from growing Asian nations switching their gasoline from coal to gasoline, LNG freight charges within the brief time period are prone to be depressed, say analysts.

Martin Senior, deputy head of LNG pricing at Argus Media, a pricing company, stated that whereas 251 new-build carriers have been as a result of be delivered between 2025 and 2027, the brand new export capability coming on-line in the identical interval may require solely 171 extra carriers.

“The market is pricing in a well-supplied LNG service market subsequent yr with ahead [freight] charges for 2025 far beneath ranges seen in earlier years,” Senior stated.

Extra reporting by Oliver Telling