I was a little stunned to read during my morning LinkedIn flick through, that BW LPG’s CEO Martin Ackermann has decided to step down at the end of the year, after five years at the helm. I was lucky enough to share a panel discussion with Martin in Houston this year at RBN’s “Energy Xport Con”, and although I’ve only known him for a short while, I was impressed how focused, and cool he was under the spotlight of the U.S. energy, and particularly NGL players. Good luck to Martin as he heads back to Denmark and his family, and I thought it would be fitting again to revisit the LPG shipping sector, as the twists and turns just keep on coming.
I think I’ve rarely used this word before when referring to the shipping sector, but today I am, and that word is “stable”. It’s starting to become the norm to refer to the market as, “well it’s around $50,000 a day”, and we also rarely hear too much about the dreaded market cycles, but we also know that this could well be the calm before the storm, yet again!
The shipping market has reached that important threshold in all financial calculations, the point of entry. The cost of a new building remains stable, albeit for all the add-ons the ship owner needs to be aware of, scrubbers, dual fuel, deck tanks etc. The time charter market is up in the $1.25 million per month plus mark, dependent on the ship and the length of charter, the spot market is closer to $2 million, but you get what it says on the packet. The ship owners have been reluctant to push time charters onto the market, as they normally come back to bite, especially in a weaker market, so decisions on coping with the vagaries of the spot market are pretty much understood these days. So the big question is whether the numbers can go higher, or are we about to see the freight market ease back, or maybe even fall off.
There are always many factors to bear in mind before reaching any concrete decision, and for me a lot is focused on the ARB. The front of the ARB curve is over $200/ Mt wide, but then narrows by $60/ Mt at this time next year. But what does that tell us? We would normally expect the ARB to start to squeeze in as crude oil is backwardated over the same period, and a common rule of thumb would suggest that higher crude oil prices tend to bolster the FEI levels in Asia relatively more than it does Mont Belvieu prices in the U.S. market. The energy market in the U.S. is still influenced as much by its own supply/ demand questions, as it is by the movements in the international market, while Asia is geared to imports and is closely correlated to the price of crude oil. So when push comes to shove, I would expect the ARB to widen from it’s current position inter alia more specific LPG fundamentals.
A big factor that has impacted Asia in the latter part of the year has been the strength of naphtha and the pull effect on demand for LPG, especially butane, as a feedstock in the Asian steam crackers. The same is true in Europe for LPGs generally, but the pull has been dominated by Asia where the supply/ demand balances have been impacted far more with supply reductions in the Middle East, while Europe has seen more availabilities emanating from the Marcus Hook terminal on the U.S. east coast. The impact of the drone attack on Saudi naphtha supplies, reduced condensate availabilities from Iran, and planned refinery turnarounds, have all kept naphtha strong. But there is a concern that with the refineries re-configuring their product slate in light of the requirements for low Sulphur material, following IMO 2020, we could see ample naphtha availability looking for a home.
The counter argument is that Asian petrochemical steam cracker demand is pretty much constant, especially given the large margins currently enjoyed, and any reduction in margins due to cheaper naphtha, although telling, would not be significant in itself, especially as LPG prices may also be relatively weak. Add the growth of propane dehydrogenation (PDH) plants, especially in China, and it doesn’t look as it will be any weakness in the petrochemical sector that could reduce the relative value of the FEI.
As we move towards cleaner energy, LPG becomes one of the friendliest and most positive of the fossil fuels. There are still 3 billion people in the world who use highly dangerous and polluting fuels to cook their daily meals. The incentives given by Indonesia and India in recent years to encourage the replacement of wood, cow dung and kerosene, with LPG, should also be rolled out in other countries, as it is a cleaner and less dangerous staple energy requirement for a huge portion of the world’s population. This movement will continue in 2020 and beyond, especially in Asia. It might not be as visible as a new PDH plant, but subliminally it will suck-in more imports of LPG into Asia as the price relative to crude oil and its derivatives remains at low levels. Again this can only be positive for the ARB.
The supply end of the ARB is influenced of course by production, real and forecast. Most market players have been caught out by the speed and size of U.S. shale production growth, and as with most things that grow so quickly, we are all skeptical as to how long the supply growth can continue. 2019 started to feel as if the early optimism for higher production growth was going to be thwarted by takeaway bottlenecks, due to not enough pipeline, fractionation and export terminal capacity. Without doubt, it felt as if the production levels had to be put on hold, but during the year, Marcus Hook started to flow exports as a result of the Mariner East 2 connectivity, P66 at Freeport managed to squeeze out a couple more cargoes a month, which doesn’t sound a lot, but translated into annual volumes, P66’s increased exports comes out at over 1 million Mt in 2019. Then by the end of 2019, Enterprise were cranking up their cargo loading speed, and this was starting to increase export slots and shipments, albeit less than expected. Year-to-date production growth in the U.S. overall has been running close to 15%. I’m interested to see where export volumes finally settle this year, but I wouldn’t be surprised to see the growth year-on-year at over 5 million Mt, and very close to 40 million in total.
Where production and exports will end up next year is going to be the key to determining the future strength of the shipping market, and I haven’t even touched on what might be going on within the shipping market itself. Tune-in tomorrow.