Weight of Freight: Gas carriers’ ammonia puzzle

Yohanna Pinheiro: Hello all and welcome to the weight of freight podcast, where we explore the powerful connections between freight and commodities markets. I am Yohanna Pinheiro, reporter for Argus Gas Freight and today we will take a closer look at the emerging ammonia freight market. Ammonia is a key pathway to shipping's decarbonization through its use as a bunkering fuel, and newbuild orders are growing rapidly both for ammonia-fuelled ships and ammonia carriers. But what can we expect from this new market? To discuss this I’m joined by Lisa Assmann and Mathias Kyllingstad from Norwegian shipbroking company Steem1960. Lisa is a senior shipbroker focusing on long term ammonia projects. She was head of the gas analytics team for six years as a leading expert in LPG, ammonia and petrochemical markets. Thanks for joining, Lisa.

Lisa Assmann: Thank you, Yohanna.

YP: And Mathias is a gas analyst working closely to Lisa at Steem1960 covering gas markets since 2022. Before that he worked for five years as a financial and logistical officer at the Royal Norwegian Navy. Thanks, Mathias.

Mathias Kyllingstad: Thanks for having us!

YP: So to kick this off, could you give us an overview of the seaborne ammonia market today?

LA: So today the seaborne ammonia market is around 15 million tonnes. It has been a little bit bigger before. But due to the Ukraine, Russia situation, some volumes from the Black Sea have disappeared and we have seen some more volumes coming from the Middle East and the US instead. So this market has been quite stable for some years and is mainly a market for fertilisers today. That hasn't changed much and it's not likely to change massively in the in the very near future and it's covered by LPG carriers. We don't call the vessels that carry ammonia as ammonia carriers as such, because in in principle it's vessels that can take LPG and some other products potentially as well. But it's mainly LPG and ammonia. It is in total today around 80 ships that carry that seaborne ammonia. It changes a little bit depending on how strong the ammonia market is, and the LPG market, because these vessels can switch between LPG and ammonia.

YP: How often does that happen, switching among LPG and ammonia markets? How easy it is to transit from one to the other?

LA: We can in general say that it's not daily that ships shift grade as we call it between LPG and ammonia. So the share of vessels or the amount of vessels is over time relatively stable, but sometimes ships change grade. And that's as I said before, depending on what pays better from an owner's perspective, of course, and what the market needs. We usually need to calculate about two weeks to change grade, more or less. It depends a little bit on the ship and the trade and how long it has been carrying ammonia and which direction you're switching to. But it’s a very rough ballpark timing. It can change like I would say every half year or every two months. It depends a little bit on how long the contracts are and what is happening in the markets. There are some players that switch between single voyages, because you can do it, as I said, within two weeks, but it costs time to do the change. So if the vessels time is expensive, you would rather avoid that maybe and then also you need to have some coolant to clean the vessel and gas it up again and so on. So it depends really on the situation

MK: Very often we see that owners require some longer commitments if they are to switch from LPG to ammonia due to the long process of going back to carrying ammonia. So that's the kind of pattern we see that the ammonia trade is often linked to longer time charter parties and so on.

LA: The LPG market is much bigger and much more liquid than the ammonia shipping markets so, from an owner's perspective, you would have much more flexibility in in having your ship under LPG and trading it there. There is very little spot activity in the in the ammonia market, if at all.

YP: I see, I see. And has that left the market maybe undersupplied or oversupplied? How is that balanced?

LA: Yeah, it depends what you define as under supplied and so on. I mean it's a market after all. So, so of course if you have little activity in LPG and ammonia, you would have maybe an oversupply at market. But we haven't seen that for many years or quite some years since maybe 2017 or so. So lately the market has been has been quite active both on the LPG side on to some degree on the ammonia side, not necessarily because more volume has been carried, but because the distances have increased so. So the last few years we had quite a what we call a balanced market, meaning that small changes make a big difference.

MK: So to put it into context, the total volume of waterborne ammonia, the last couple of years has declined by roughly 2-3mn tonnes. But yet the demand for vessels are exactly the same that we saw two years ago. That is due to what Lisa mentioned, increased distances. We see that Mediterranean and European receivers now source the products from the US and the Middle East, which require a longer sailing distance. So the dynamics have changed. But the vessel demand stays relatively firm from the ammonia side.

LA: On the LPG side, we have seen growing demand. We also have seen more inefficiencies in the market that also trickle down from the larger vessel sizes. So that has an effect on the overall vessel balance if you want. If you want to say which is tight at the moment.

YP: And just to add to the longer distances observation, you mean from the Mideast Gulf to Europe because now vessels are going around all the way around Cape of Good Hope instead of going via Suez because of the tensions in the Red Sea. Is that correct?

MK: Exactly. And this is the fulfilment also of the product contracts which was signed one year ago, before the entire situation in the Red Sea changed. So yeah, the distances are getting longer and there's a lot of disruptions in the market.

LA: Yeah, as not only these situations, but we see also the volumes that originally came from the Black Sea as well-being replaced. And from the Baltics that are there to some degree today. But yeah, if you have to source this that into the West from the Middle East or US instead that also increases distances not to the same degree as the Cape of Good Hope situation, but still.

YP: Yeah, I see. And in it has been quite a bit piece of conversation in the market about how many shipowners have already stepped up and ordered dozens of vessels, especially the Very Large Ammonia Carriers (VLACs) ahead of the expected uptake in ammonia production. So if we can look at the orderbook, how many vessels are coming especially by 2028, when most of them are expected to be delivered?

MK: Yeah. So in general, the VLAC versus VLGC is a bit kind of strange and misleading difference, because we perceive them all as Very Large Gas Carriers where the VLACs has the technical capacity of carrying a full cargo of ammonia. And as you mentioned, more and more owners are now ordering the VLGCs with this ammonia capacity, which makes them a VLAC. And the orderbook in total almost counts 100 vessels now versus an existing fleet of close to 400 vessels. So it's a significant orderbook. Almost 60% of these ordered vessels have full ammonia capacity. These will, as you mentioned, be delivered before and in 2028. As we perceive the new kind of future ammonia market with all this new blue and green projects, we don't see all these new VLACs doing ammonia trade when they are being delivered. These will function practically as VLGCS in the first phase one they being delivered.

LA: So just to emphasise what Matthias said, we perceive that more as an optionality that given the price that you have today for such a ship, to add this capacity is a relatively good option or cheap option to have, given that you think the ammonia market will develop to whatever degree. So in that respect, to be clear, we don't perceive these vessels being ordered specifically for any new ammonia trades or as a majority. At least there are some units that we think are ordered against ammonia projects. But the majority of this big orderbook is not ordered against ammonia trades mainly, but it's a consequence of growing LPG market more than anything else.

YP: And how long will that take that phase of waiting around? Will there be enough cargoes to absorb all these vessels later? And when is that?

LA: There will be not necessarily a waiting around. They will be employed in LPG and whenever in a big ammonia trades will come online, they can also do these trades. And as Mathias and I go into our view for the future of this market, but we see it as a as common market. It's hard to say if it will be five vessels, if it will be a 100.

MK: We believe that there are still some uncertainties related to these new projects, both in terms of volume, how many of these will actually be completed and when they will be completed. So we don't see like a switch being turned on in terms of new ammonia trade or additional ammonia today, trade that will happen gradually and potentially. And at some point, let's say 10 years, 15 years down the line, we might see that the VLGC market would look pretty similar to what the MGC market is today, with more vessels doing either LPG or ammonia or doing swing trade between them.

YP: Are ports ready to receive VLACs? Because one of the point of concern is if there is infrastructure for this new take of ammonia cargos.

LA: The current infrastructure, as you might know, for the fertiliser ammonia, it doesn't really accommodate VLGCs or VLACs and the lot size have never been big enough. Even though like in earlier times for vessels bid before 2009 we had some units that could take ammonia cargos on the VLGC side because people were expecting to see bigger lot size. But that never happened. And today's infrastructure is fitted to MGC lot sizes, handysizes and some ports only, even for LGC storage lots in port conditions. We see that some more ports of course are being built out and there's big plans for VLACs, if it is in Europe or in the Far East and in the US with big blue ammonia projects. That's definitely the plan, but to build out this infrastructure, there need to be more FIDs, more certainty, huge investments are involved and you don't change the port and make it draught steeper and build bigger storages within 2-3 years. So this usually takes longer than building a ship, but that's why we think the infrastructure will not be ready in the very near future. I think it needs at least 10 years that we see like a bigger constant flows, maybe we have few ports that are ready. But not the majority of these projects that we talk about will be connected to big enough infrastructure as we speak.

YP: And where are the products located? As in the main demand and production centres, where is the shift in routes that we are seeing in the future ammonia market?

MK: So we have it identified a lot of projects in the, of course in the United States Gulf. Several announced projects there well underway, a few of them as well. In addition to the traditional areas in the in the Arabian Gulf, Australia is in the forefront in terms of new green projects, as well as certain projects in Canada and Latin America. So yeah, and northwestern Europe. So it's very spread compared to today's flow of traditional ammonia. It changes, rattles, the trade dynamics quite dramatically going forward.

LA: Yes. So we think the distances will be even longer than before on average for these new projects compared to the existing fertiliser, ammonia trade.

MK: And in terms of offtake and appetite, we see that especially in the Far East, there's an upside potential. There is interest, especially from the likes of South Korea and especially Japan, so a lot of product will flow in that direction as well as the major trading hubs around ARA, Mediterranean and so on.

YP: Building from your take that the VLACs will be trading LPG before they trade ammonia, then we can expect that as a there'll be a large pressure in the LPG market around that time 2028/2029. But then, considering the longer routes and the uptake of production, is there any indication on how freight rates will perform once these new volumes start hitting the water?

MK: So fundamentally on the LPG market, we see that the orderbook will have an impact and a downward pressure on freight rates. With that being said, we know that the VLGC spot market in particular are fluctuating very much in terms of the Panama Canal congestion, rerouting and general disruptions in an inefficiencies related to congestion. So but we see that the orderbook and the fleet growth is outpacing the demand for shipping the next couple of years. But then again you have new terminal expansions in the US Gulf, we expect to see some more LPG hit the waters from the MEG in the wake of the new natural gas field expansions and the new projects in in the Middle East area. So we see that the market will be fairly balanced in the three to four years window. But you know, if only a fraction of these announced ammonia projects happen, and the VLACs will be engaged in this trade, then the market will suddenly be tight. If, for example, the newbuild or the ordering activity declines going forward. So let's say it will maybe adjust the next couple of years before it stabilises. And what happens in the ammonia market will be a major factor after that, when we get close to the 2030 forward.

YP: We know that there have been already several tests going on to use ammonia as a fuel. Is there an expectation of when can we see them in the market trading?

LA: Yes, I mean there are some already ordered as you might know and things are being tested. There are a bit unclear views on how much the fuel consumption will be and so on and certain procedures around burning ammonia, of course, but I think the first way to prove it is obviously in the ammonia carrying gas markets of, although of course there are other vessels that are watered with ammonia dual-fuel or optionality for that as well, but I think we need to see how this works for the few units that are ordered before we see the majority of owners to be able to go for that solution, let's say. And also of course the availability to bunker ammonia, the various places and so on is also not really there. So I think we are quite conservative in our view on when say the seaborne or the marine fuel ammonia demand will hit the market. I think that will be later than other clean ammonia demands.

YP: Could you mention a few that are the potential opportunities for the ammonia market is in new demands?

MK: We know that, for example, hydrogen and ammonia's role as a hydrogen carrier is one of kind of the big potential drivers for clean ammonia in the future, but that is interlinked of course with the with the hydrogen story and if whether or not hydrogen will scale up and become alternative energy source in the future. Because I think that's the single biggest demand driver for seaborne clean ammonia in the future. And of course you can also use ammonia for industrial purposes. There has been talk about using it as a co-firing alternative in coal plants and so on, power generation. But I mean, I think hydrogen being a hydrogen carrier as well as a marine fuel down the line is kind of the two biggest demand drivers for clean ammonia.

LA: And of course also to replace grey ammonia and the fertiliser production, that will be one of the first things we had a willingness to pay is high enough, let's say, which will be mainly in Europe in my view, yeah.

YP: Considering that the ammonia market is a future market, but it needs investment today,

YP: How risky would you say that it is right now to invest in the ammonia market?

MK: On the shipping side?

YP: Yes.

LA: I think what we see is that we have a yard situation that is quite tight as well. So we have very high new building prices compared to historical developments. So from that perspective, I would say yeah, it's maybe risky to invest in ships, but on the other hand, you have a big story there. You have a big optionality upside risk here that there will be a new market and the LPG market is also growing. On the other hand, I would say also there is a lot of technological development. You don't get the same ships that you got five years ago. You have maybe dual-fuel ammonia, you have much bigger vessels with new technologies. So from that perspective, I think there's a lot of good development spurred by the new ammonia story, if you want to call it like this, so that's maybe a positive note in that respect.

MK: Yeah, and I think the place to start before doing any investments is to look at the LPG market, because you're not purely betting on ammonia. This is more like being able to stand on more than one foot and that you can do in this in this segment. And there is a lot, even though there is a lot of projects being announced on the ammonia side. This we see that more and more vessels with ammonia are carrying capacity is being built. We still also see that there's a lot of hurdles and a lot of infrastructure related work to be done before the this potential new flow of ammonia will happen. But in the meantime, ordering within ammonia optionality, in the big picture, is a pretty cheap bet.

YP: Wonderful! Thank you for sharing your expertise today, Lisa and Matthias.

LA and MK: Thank you for having us.

YP: And some news Argus is advancing its coverage in the ammonia freight markets by launching a set of 10 new daily rates for large and medium gas carriers. These will help participants to track market fluctuations and take informed long term strategy decisions. Thank you everyone for tuning in. We hope to see you again in the next Weight of Freight. Goodbye.