VLGC delays to offset influx of new ships in 2023

Panama Canal congestion and emission regulations should counteract the downward pressure on rates from new vessel deliveries, writes Jamie Aldridge

Very large gas carrier (VLGC) owners expect growing operational inefficiencies to offset the pressure on freight rates from a large delivery of new vessels next year. Worsening delays at the Panama Canal in particular should reduce VLGC availability in 2023, the companies say.

Asia-Pacific demand, specifically from India and China, will help stretch the VLGC fleet further in 2023, and is likely to outweigh the added availability from 46 new VLGCs that are due for delivery next year, or 14pc of the global fleet, according to Oslo-listed Avance Gas. An increase in older vessels should also trigger more scrapping in 2023, the firm says. The number of VLGCs older than 20 years old in the market has reached 47, of which 30 are older than 25.

Fellow Oslo-listed VLGC owner BW LPG also says a strong orderbook next year will be offset by inefficiencies. These include an expected requirement to reduce vessel speeds when the International Maritime Organisation's (IMO) energy efficiency existing ship index (EEXI) regulations come into force on 1 January 2023 — which could also stimulate scrapping, BW LPG says.

Another core operational challenge will come from delays at the Panama Canal — vital to LPG trade on VLGCs from the US Gulf coast to Asia-Pacific. Waiting times for vessels without reservations to transit the canal reached their highest this year in May as congestion built. And in early August, waiting times rose to around two weeks for a northbound and southbound transit, which prompted shipowners and traders to find alternative routes on ballast legs to the US Gulf, including around the Cape of Good Hope or through the Suez Canal.

Growing demand for imports of US LPG in Asia-Pacific will only further increase traffic at the canal, creating more congestion. The US is expected to become a more significant LPG exporter to China's petrochemical sector, as well as to residential markets in southeast Asia and India, over the long term, according to Avance. The extra demand for VLGCs from the US as exports rise, as well as from the Middle East as it too expands exports, has the potential to create vessel supply disruptions as a result of the operational challenges, it says.

Strong quarter

All three companies managed to lift their profits in the second quarter compared with a year earlier, supported by a rise in freight rates and stronger European import demand. The benchmark Ras Tanura-Chiba rate from the Mideast Gulf to northeast Asia averaged around $76/t in April-June, up from $57/t in the first quarter and $52/t a year earlier. The Houston-Chiba rate from the US Gulf coast to Japan increased to around $122/t in the second quarter from $101/t in January-March, and $88/t in April-June 2021.

Demand for VLGCs during the quarter was bolstered by US LPG exports hitting a record high 4.7mn t in June, with more demand emerging from Europe, BW LPG says. Net exports from the country are forecast to increase by 17pc on the year in the second half of 2022, according to US government agency the EIA. But global demand could have been higher in April-June, with propane dehydrogenation (PDH) and ethylene cracker operators in China struggling with weak margins, leading to some plants lowering utilisation and limiting import demand. Covid-19 lockdowns in China during the quarter also pared LPG demand in the country, and in turn import slowed import growth.

Dorian LPG made a profit of $24.8mn in April-June, up from $4.9mn a year earlier, while BW LPG's profits increased to $38.6mn from $23.1mn. Avance's rose even more strongly, to $18.4mn from $1.5mn a year earlier, but this was partially owing to the sale of the 2008-built Providence, which generated a $4.5mn profit and a cash release of $25.8mn.

VLGC spot rates