It’s Election Day in the U.K. as I pen this SIMON SAYS, the third election in 5 years, the stakes are high both for the future of Brexit, the future of the National Health Service, and for that matter the future of the World. The wind is howling, the rain is pouring, it’s a truly British day. I’ve just put my X in the box, my decision made, I’ll now need to wait 12 hours at least to find out who is going to win. It’s been a bit like that for the shipping world, which box do they put their cross in, and what does the future hold. I’ve been pretty bullish on the LPG export volumes we expect to see over the next five years, especially compared to other analysts and commentators, I won’t say “most”, but reading into the number of new buildings planned ahead, I would suggest my view is not the majority.
So, we have 2020 just around the corner, and by my rough calculations, we should have a VLGC fleet list standing at over 290 ships by the decade’s end, less than 5% are operating as floating storages. Furthermore, we have around 40 new VLGCs on order, with 20 plus next year, followed by 12 to 13 in 2021, and 5 or 6 in 2022. So by my simple maths I outlined yesterday, we are 30 ships short by 2025. Scrapping is not a substantial factor in many people’s minds, but it is there, and in 5 years’ time nearly 12% of the current fleet will be pre-2000 built, i.e. over 25 years old, and of that figure, nearly 8.5% will be older than 30 years. Doing the maths on 290 vessels in operation, we are going to have over 30 VLGCs older than 25 years, with 20 over 30 years old.
There hasn’t been a VLGC scrapped in 2019, but with the strength of the market and the uncertainty of IMO 2020, I wouldn’t have expected any demolitions to have happened anyway. Five ships were scrapped in 2018 when the market was a lot softer. As day follows night, the shipping market is not always going to be heading up, there will be periods when the market dips for some reason. Shut-in of crude in the Middle East say, or some other factor driving the strong market scenario the other way. So there’ll be a time when more than just old age will be the driving force. Estimates I have come across would suggest that three-quarters of the 30 year old ships will be scrapped. This might push 5-10 ships up the beach in India and Bangladesh in the next two years, but it will mean 20 VLGCs being broken-up by the beginning of 2025. Let’s face it, these ships are going to be woefully inefficient, special surveys will be costly to get through, and maintaining the proper vetting status will also become more difficult and more expensive. If the market remains as strong as it is today, then ship owners with old tonnage are going to persevere for as long as they can, but for five years, that’s going to be a lot tougher.
Capital constraints are also an issue ship-owners will have to come to terms with. The ability to rush to the equities market for cheap financing, and to shipping banks, previously keen to lend to the shipping sector as a whole, but I am going back a number of years, has dried up even though the talk is always of money slushing around somewhere. The shipping sector, coupled with the movement of fossil fuels, has registered already with investors as an activity that might be a little more short-lived than most had previously expected, so new buildings with 30 year lives need to be paid back earlier and earlier, with greater and greater premiums.
The ship owners are also in this decision making conundrum of what preferred propulsion to plant their X mark against for the next couple of decades. The technology and the rules are likely to be constantly and quickly changing. Certainly the LPG option sits easier with LPG ship owners in comparison with bulk and tanker owners, as they understand the product and how it behaves. But the move to dual fuel is limited mainly to the new buildings, given the cost to install is far less, although still substantial, than retrofitting entire fleets. The last cost I had seen was not far south of $8 million for a retrofit engine, and the new building engine is just over a third of this cost. But it’s making that decision, always knowing that the technological improvements are going to happen, and the changes are rapid, so a decision today might be better left until next year. Without doubt, the market psychology is there. It might also be worth adding that the ship owners are reluctant to commit working capital to new tonnage, as they need to have funds available to cover potential costs associated with possible retrofitting decisions. The decisions might be forced on the ship owners if ships become commercially uncompetitive or further rule changes are imposed. So why spend money on the future if it will have to be spent on the past. Let’s also not forget that 2015 new buildings, and there were nearly 40, will be having their first special survey in 2020, and don’t forget nearly 45 will be due a year later.
As LPG exports increase, the terminals will get busier, especially in the U.S., where the announcement from all the major export terminals that they have plans to expand future capacity, although this was needed, it was also at a time when possible new U.S. export terminals were being discussed and possibly confirmed. The thought of extra capacity coming on at existing terminals, and potentially lowering terminal fees, drove them back down underground. But, it means more LPG will be exported from Enterprise and Targa along the Houston Ship Channel (HSC), maybe 50% or more of the total increased LPG exports from the U.S. will have to use the HSC. And although there are plans and agreements to have two-way movement along the channel, it must surely increase the congestion, and it is an area where the meeting of cold air coming south in winter, and the warm air from the Gulf of Mexico, produce the dreaded fog. Delays ultimately reduce the number of cargoes that VLGCs can load in a year, and as I have seen with my own eyes, ships don’t come forward, they always go back.
With more terminals, even just along the Texas coast, it would spread the chances of possible delays. Let’s face it, all eyes should be on Houston; this is where the extra international LPG volumes will predominantly come from. Oh yes, the Panama Canal is only 4 days sailing away from Houston and it provides U.S. cargoes with the huge saving in time in getting to the market. Now your guess is as good as mine on future congestion, but the market has enjoyed a relatively smooth passage of LPG ships in the last couple of years. It can only get worse, and recent issue with fog did cause a few hearts to flutter, as to what may lie around the corner.
I would love to throw a lifeline to suppliers that their netback prices are not going to be eroded by the strength of the shipping market over the next five years, but I can’t. Unless there is something in the U.S. that forces the ARB to narrow, the show will go on, and I think the holes in the road will be less in the next five years than we have probably seen in any previous five year period. The only reason we think $125/ Mt is damn expensive, is that we thought $40/ Mt was ridiculously cheap. In five years’ time maybe $125/ Mt will be cheap, and $175/ Mt expensive. If new buildings are not ordered in the next 24 months, then I think those companies with LPG ships will have forgotten the pains of OPEX, CAPEX and BREXIT! Come on Boris!