Prompt spot charter rates for LNG carriers have bucked the usual seasonal trend and reached record lows in recent weeks — limiting the scope for price signals to direct or redirect LNG flows, and help balance the global market.
The recent weakness in prompt charter market values has been focused in the Atlantic basin. This stands in contrast with the Novembers of previous years, when the Atlantic has mostly kept at a premium to the Pacific because of European floating storage.
The ARV2 prompt rate for US-northwest Europe by tri-fuel diesel-electric (TFDE) carriers was already approaching its record low — set in March 2021 — in the first half of October, passing it later in the month and staying lower. But while the ARV1 prompt rate for Australia-northeast Asia by TFDE carriers had held a sizeable premium to the ARV2 rate, recent falls in the Pacific rate pushed it below its record low — also set in March 2021 — on 15 November, probably partly as some vessels were repositioned to the Pacific from the Atlantic.
Sublet market
The weak LNG freight market mainly reflects the quick pace of newbuild vessel deliveries in recent months and weak demand for loadings from liquefaction capacity additions. It also reflects minimal incentive for floating storage or inter-basin sailing — at least for those companies not sat on surplus shipping. Around 60 new LNG carriers are due on the water this year, nearly double 2023's 31 deliveries. And the pace of new deliveries will quicken next year, when 91 are scheduled to be delivered.
But record low rates and, perhaps more importantly, the fact they are holding there for a sustained period, also reflects a structural shift in LNG freight supply in recent years, which was papered over by a run of strong fourth quarters in 2021-23, and which severely limits the market's ability to react to price signals. Atlantic prompt rates had risen above $250,000/d by January 2021, with exceptionally low vessel availability leaving some firms unable to deliver US cargoes to Asia over Europe, despite a substantial premium for Pacific deliveries. At points that winter, participants reported no open vessels in the entire market.
While already moving in this direction at the end of the last decade, winter LNG freight in the past few years has had few TFDE or two-stroke vessels — and for substantial periods, none — offered for prompt spot charters by shipowners themselves within the season. Instead, nearly all vessel supply has taken the form of charterers seeking to sublet carriers they have previously secured for fixed terms — be it for short or long periods.
This has stemmed, in no small part, from record high rates during the fourth quarter of recent years leading to a flurry of term chartering ahead of winter. Most firms have preferred the risk of a shipping surplus than the risk of a shortage, after a tight freight market in the middle of winter 2020-21 left some firms having to cancel loadings because they could not find vessels to deliver them.
Term chartering was slower this summer than in recent years, and yet almost no owners were left with open vessels ahead of winter, according to market participants. This means carriers offered for subletting are poised to make up the vast bulk of supply in the winter spot charter market — even before charterers piled into the market just before the end of the summer, racing to find carriers as the floating storage incentive failed to emerge and the inter-basin arbitrage closed. And the vast majority of carriers coming on to the water in the latter half of this year are already tied to term charters, with few speculative newbuild orders likely to deliver in the next couple of years.
Owners holding open shipping in such a weak market would have been better able to remove vessels from the market when rates fell below their operational costs — deemed by some market participants to a little over $20,000/d, at least for TFDE carriers — effectively acting as a supply-side response to price signals. But this is not an option available to charterers holding surplus ships, with the exception of carriers taken on bareboat charters, pushing them to seek employment at rates below this threshold.
For the many firms sat on spare shipping that they initially hoped they could use themselves or sublet in a stronger market, this has taken the form of actual charters or — more commonly — finding employment within their portfolios, such as aggressively competing for fob cargoes or undertaking inter-basin deliveries, even when the spot arbitrage has been closed.
New shipping economics
Asian LNG markets had continued to command a premium to Europe, although it was insufficient to cover the additional shipping costs — based on spot charter rates — for delivery of US cargoes to Asia rather than Europe, assuming spot deliveries around the Cape of Good Hope route.
But for firms sitting on surplus carriers that they are unable to sublet even close to their term charters on the vessels, or sublet at all, there has remained an incentive to continue delivering US LNG to Asia to recoup at least some of their freight costs so long as the additional boil-off and return fuel costs are covered.
Together with the inter-basin arbitrage being open for much of the past summer, during which some fourth-quarter US cargoes would have been marketed and then sold into Asia, firms with shipping they deem a sunk cost continuing to deliver to Asia have bolstered inter-basin flows.
In turn, this has weighed on European receipts, even when the arbitrage has been closed on strong European demand and comparatively weak Asian interest in more purchases, leaving Europe to bid higher and higher relative to Asia as price signals have failed to result in a sufficient redirection of flows to Europe and balance fundamentals between the two basins.
European prices in recent days have instead had to inch closer to prices on Asia-Pacific markets — so those markets' premium is not sufficient to even cover the additional boil-off and return fuel costs — and European values even turned to a premium over Asia last week. This eventually spurred a large number of diversions of laden carriers to Europe through mid-November, which has helped to balance out global supply. Almost 10 carriers laden with LNG from the US or west Africa have been diverted away from routes towards Asia in recent days, and were sailing for European delivery, although it remains to be seen how long lived this change in flows might be, given that European prices softened against Asian values in recent days.
Forward rates for fixtures throughout this winter remain close to prompt rates' nadir, and even more ships could come to the spot charter market as more US LNG flows to Europe instead of Asia. This suggests that Europe's need to compete at almost price-parity with Asia — rather than just hold at enough of a discount so that the additional spot freight costs are not covered — to keep enough LNG flowing in its direction may remain, at least in the short-term.
But beyond next quarter, together with expected LNG supply increases in the US, carriers tied to short-term winter charters are due to come off-charter as the season draws to a close. And if rates do remain at such lows, owners taking back these ships will eventually be faced with a decision on whether to seek new fixtures or take them into short-term lay-up.
