SIMON SAYS: So why did the VLGC market just fall out of bed?

Submitted by phambric on Sun, 01/31/2021 - 13:03
So why did the VLGC market just fall out of bed?

It could only be three weeks ago to the day that I just happened to be talking to a very knowledgeable personality in our business, I jested with him that in my view the VLGC freight market had become “crazy” with a capital “C”, and surely it was time for a significant correction. He’d heard Pertamina were short of a ship to load out of the U.S. Gulf on prompt dates, and the vultures were circling their prey. We even shared a smile that the rate might even end up above $200/ Mt. Now, I have pinched myself a number of times to make sure I wasn’t just remembering a distant dream, lockdown can do funny things to us all. No it was true, maybe a fixture wasn’t in the end concluded at $200/ Mt, but around that first weekend of 2021 the rate was certainly north of $180/ Mt, and time charter equivalent returns were burning the ship owner’s pockets at just under $3.4 million per month, give or take.

I’m now sitting at my screen, having phoned another friend in Athens, it’s phone a friend day, who’s telling me that the freight market is bottoming out in the low $90s/ Mt, may be even a little lower than that. I also wish I could believe him. Freight levels in just 15 days of trading have lost more than half their value, and I don’t think it will stop there. Time charter equivalents have dropped closer to $1.3 million per month, and maybe there’s still a way to go. But why has it happened, and where will it all end-up?

So what was actually driving the market up in the first place? For me I tend to group the factors into “fear” and “peripherals”. Northern Asia was experiencing its coldest spell of winter for 7 years, and as demand shot-up, supply fears took hold. Already importers into Japan, Korea and China had refocused their buying habits towards U.S. propane, due to less availability from the Middle East, coupled with having to load split propane and butane cargoes, instead of full propane shipments. As is normally the case in cold-weather driven markets, the front month’s cash differentials went haywire, strengthening backwardation, while the ARB was pulled to well over $200/ Mt. This sort of market creates enough fear anyway, but you then can imagine being told there’s ten, maybe fifteen, even twenty day delays transiting the Panama Canal, especially  if your names not on the door, figuratively speaking. To me the Panama Canal is a peripheral, but it did create a hell of a lot of fear out in Asia!

I always think the ship owners are prodigious when it comes to enhancing the peripheral circumstances impacting the freight market. I read with interest, nearly on a daily basis, BWs running commentary on their retrofitting of VLGCs to be able to operate under dual fuel, primarily using LPG as bunkers. They’ve got 15 to retrofit, 3 have been completed, and another one is due to pop out shortly. Then we have all those ships celebrating their 5th birthday parties in some exotic dry dock, I think it’s somewhere near 70 ships that will have surveys in 2021, and you keep hearing 2-3 weeks out of the market for each of them. With the Panama delays it’s a great excuse for shipowners to miss the traffic jam, and head around the Cape of Good Hope, adding yet more days onto their schedule. Then there were interruptions discharging in northern China due to port entries icing over, the difficulties in crew changing as a result of the coronavirus pandemic, fog and chiller issues slowing down loadings out of the U.S. Gulf. But in amongst all of this peripheral disruption, there just happened to be the highest ever LPG export programme out of the U.S., or certainly not far off a record. Who said there was a shortage?

Then on 5th January this year we all had a bit of a surprise, that became the initial catalyst changing a market, more than ready to “rumble”, to one about to “crumble”. Saudi Arabia announced it was unilaterally cutting 1 million barrels a day of crude oil production, and that would mean less LPG in February, and also in March. This was bad enough news for the ship owners, but was made even worse by the lack of apparent concern of buyers in Asia. The fear had somewhat dissipated, milder weather had set-in, especially in China, PDH economics had dropped significantly, and the LNG bubble had also burst reducing a little side-show excitement.

At the same time players in the U.S. market were starting to get concerned about inventory levels; a view buoyed by seeing record exports in 2020, up nearly 14% on 2019, despite it being a year of misery for shale producers, causing so much uncertainty over current and future production levels. Coming into 2021 most industry experts have been suggesting there would be a drop in production this year, of course with caveats attached. Throw in talk of polar vortexes, and suddenly the Mont Belvieu propane numbers started to push higher. Even this week we’ve seen propane values bounce back nearly 4 cents/ gallon in a crude market short of gusto. Therefore, with some of Asia’s fear finding its way over to the U.S., the ARB began to take a pounding, ending up dropping to hardly above $110/ mt for February loading. And as the ARB quickly narrows, the cancellation rumour-mill raises it’s volume another notch, especially as a falling freight market simply cannot keep pace.

When the product market takes a fall, traders try to move out of cargo length, made easier with cutbacks in the Middle East and with cancellation clauses in the U.S., pushing their ships into the freight arena. But you have to be quick to catch the deal, as undercutting “last done” merely cascades the market down. The ship owners simply didn’t have the space, nor the time, to try and hold freight levels up, as the writing was on the wall very early, it said, if you want to find cargo for your ship you’d better chase the ARB, as well as diminishing cash differentials. BW have been one ship owner actively trying to buy cargo, in an attempt to lock their own freight-in at “internal” rates. Others have been prepared to face the reality, but it hasn’t stopped the position lists from growing, both in the East and in the West. Yes, activity has appeared, but it’s been focused on a TC requirement from an Indian charterer and a fixture out of Australia in the East, and rumblings of March cargoes being discussed out of the U.S. Gulf, albeit at a floating Baltic rate. The forward freight market has shown a little bounce, knowing this malaise will not last forever, especially with higher crude oil prices spurring greater rig activity in the U.S., and an apparent increase of 160 M Bbls/d in OPEC+s January crude oil output.

But for me we still have at least 3-4 weeks left of further downward pressure on rates, there’s still some fat to be worked off this market, and the economics are simply not working. Unless we see builds sooner rather than later in the U.S., and prices dropping further in relation to naphtha, to spur on the petrochemical buyers in Europe and Asia, the near future looks dim for the ship owners. At least my sons finally came out of their gaming encrusted bedrooms, the first time they had seen light for 48 hours, to ask me what these hedge funds were doing “trading short”, not shipping stocks, but pushing shares in a beloved gaming shop down in price? Maybe I shouldn’t be worrying about their futures, but I do!