Topics in this section: Rates for shipping natural gas are surging amid increasing flow Shippers hit all-time high day rates Global demand growth drives shipping rates LNG shipping expectations An aging fleet in need of replacement A growing LNG carrier shortage
This article is by contributing analyst Michael Filatov from Bloomberg Intelligence. It was first published on the Bloomberg Terminal.
Rates for shipping natural gas are surging amid increasing flow
Record demand for liquid natural gas and strong delivered prices support the spot rate for carriers. The global merchant fleet average age is 21 years, nearing the end of vessel-life expectancy and spurring demand for new ships. A new high for rates has emerged in 2018, with rates likely to remain elevated as global demand for natural gas expands.
The rise in LNG rates started well before seasonal norms, with China absorbing more year-round capacity, supporting day rates for the next several years. China still remains short of storage capacity, which results in port delays, though a government-mandated 14.8 billion cubic meters of storage is to be built by 2020. This equates to about 4.1% of annual consumption, well-below the global average of 10%, and poses logistical challenges. LNG shippers will continue to see new seasonal highs throughout the year, which help to drive new construction.
Shippers are set to see rates hold at elevated levels given a continued increase in shipments. China will push against infrastructure limits this year, with demand projected at 55 million metric tons a year and nameplate regasification capacity at about 62.5 million metric tons.
While spot day rates have increased due to a shortage of ships as more volume is moved during the heating season, they're being hampered by port congestion and by the growing need for floating storage. The Cool Pool is an organization of maritime shipping companies that comprises 18 tri-fuel, diesel-electric LNG carriers with a carrying capacity of 155,000-162,000 cubic meters. Sixteen of the vessels currently operate in the spot market, with the potential for further additions amid growth.
New base LNG demand around the globe has buoyed pricing during the shoulder season and will support elevated pricing in peak periods. The focus remains on adoption of cleaner-burning fuels across Asia, which provides a positive backdrop for sustainable growth over the next 20 years.
LNG spot dayrates hit a record of $195,000 for tri-fuel diesel electric tankers of 155,000-165,000 cubic meters (weekly average for both ends of the Suez Canal). Pricing has normalized closer to $75,000-$80,000. The day rate will move higher over the next several weeks as frigid weather affects large parts of Asia, Europe and North America. Shipping rates typically make up 5-20% of the delivered price of natural gas, so a movement of $100,000 in day rates is meaningful for near-term flow. The Cool Pool, a consortium of vessels from Golar, GasLog and Dynagas, continues to expand. Congestion at ports is becoming a hindrance, as many different products compete for dock space, pilots and convoys, and ship sizes expand.
Long-term time-charter contracts are important, but tightness in rates supports new orders without contracts.
China wants to establish LNG as the standard for maritime bunker fuel, according to a proposal by the Chinese Ministry of Transport. With IMO 2020 around the corner, the plan seeks to speed planning and implementation of LNG bunkering infrastructure across the country. The release also said LNG-bunkered vessels recently accounted for 15% of new ships, vs. 10% in 2017. Additionally, almost 50 percent of vessels in areas such as Beijing-Tianjin-Heibei and the Yangtze River delta are LNG-bunkered.
If the plan is approved, it will lead to a massive uplift in the speed of LNG bunker-fuel adoption as China's government mandated initiatives are rapidly carried out without hesitation. LNG adoption across industries in the country begs the question of whether Chinese tariffs on U.S. LNG imports will come to fruition.
More than half of the merchant fleet will need to be replaced within the few years following the implementation of stricter international bunker fuel regulations. United Nations Conference on Trade and Development Data published in 2017 in the Review of Maritime Investment show that 53% of the world merchant fleet is 20 years of age or older. The average useful life of maritime vessels tends to be in the 25-30-year range.
With about 29,000 vessels soon to reach retirement, we believe that this implies a greater likelihood of new LNG bunkered vessels rather than the adoption of scrubber systems that can cost up to $10 million and a year to install.
GasLog has two newbuilds expected for delivery in 2019 and two more by year-end 2020, in-line with the company's expectations of a growing ship shortage. The company referenced Poten data that show only 85 LNG carriers on order, which represents just 7% of the global fleet by the end of 2019. With a 2 1/2-year lead time and LNG supply accelerating as a result of robust global demand, the need for additional vessels and a tightness in the LNG shipping market over the coming years is evident.
Every $10,000 time charter equivalent generates $3.5 million of Ebitda for each of GasLog's spot vessels, which flows directly to the bottom line. With five vessels in the cool pool and a strong presence in the order book through 2020, GasLog is primed for a tight shipping market.
"We estimate ... a shortfall of between 28-56 vessels by the end of 2022 and between 105-137 vessels by 2025. These ranges represent an update of the estimates we presented at our Investor Day in April. In particular, the shortfall by 2025 has increased, as WoodMackenzie's most recent LNG demand forecasts more than offset the additions to the order book over the past three months."
Paul Wogan - Chief Executive Officer, GasLog Q2 2018 Earnings Call, Aug. 2, 2018
