Transit restrictions at the Panama Canal and rising US LPG production will support rates for very large gas carriers (VLGCs) in 2024 as trade flows continue to be rerouted through the Suez Canal or around the Cape of Good Hope.
The Panama Canal Authority announced traffic restrictions in late October because of historically low water levels at Gatun Lake which feeds the canal. Although the authority has since reversed its plan to cut transits through the winter months, restrictions could persist given that water levels tend to gradually decline until May because of the dry season.
Since the restrictions were imposed, most VLGCs taking LPG from the US to east Asia have been forced to reroute, adding about two weeks to the journey. The restrictions are tighter for LPG carriers, as they are designated the lowest priority at the canal below passenger ships, container vessels and LNG carriers.
The longer routes drove VLGC tonne-miles up by 1.3pc in November compared with a year earlier despite a 3.1pc decline in exports over the same period, according to Vortexa data. As a result, ships were kept off the spot market for longer. This is reflected by the Argus Houston to Chiba rate, which rose to a record average of $236.28/t in November, up from $194.39/t at the same time in 2022.
With the Panama Canal off limits for most VLGCs, the Houston to Chiba rate has become a theoretical reference for voyages via the Suez Canal or around the Cape of Good Hope, adding about $70-90/t to shipping costs at current market levels. The few VLGCs that can transit through the old, narrower Panamax locks are the exception and have been trading with a high premium.
VLGC rates have retreated since the initial spike after the Panama Canal restrictions were imposed. The surge in rates in early November ended up weighing on LPG demand in Asia-Pacific as many petrochemical plants in the region responded by reducing their LPG intake, scaling back operations or, in some cases, shutting down entirely. This led to weeks of lacklustre vessel booking and a rise in available vessel numbers. The fall in rates could encourage Asian petrochemical plants back into the VLGC market in 2024.
US propane prices are likely to remain under pressure from persistent oversupply next year, driven by strong production, high inventories and weak domestic demand. US exports are projected to rise by 7pc in 2024, according to Argus Consulting, while more propane dehydrogenation (PDH) plants are scheduled to start up in China in 2024, driving up demand.
India's residential LPG market continues to grow, strengthening the country's position as the largest demand centre behind China. India imported 14.89mn t of LPG in January-November 2023, a rise of 10.5pc from the same period in 2022, according to Vortexa data. This trend is on course to continue into 2024.
Exports from the Mideast Gulf have also grown despite voluntary crude production cuts by some of the region's Opec+ members. The region exported 25.3mn t of LPG on VLGCs to east Asia in January-November, compared with 24.7mn t in 2022, Vortexa data show.
The VLGC orderbook is due to shrink after the first quarter of 2024 having been elevated over the past two years. But rates are likely to remain supported by growth in Asian demand and Atlantic basin supply, and longer routes adding to tonne miles.
