SIMON SAYS: So why don’t the main LPG Exporters in the World control the Shipping of their Product?

Submitted by Simon Hill on Tue, 11/19/2019 - 05:00
So why don’t the main LPG Exporters in the World control the Shipping of their Product?

I still believe that if you have any serious intentions to be a player in the LPG world, you need a ship, whether you own it or charter it doesn’t really matter, all that counts is that you have one. Now a lot of people will remind me that the market has been on its knees many times over the last ten years or so, and for many periods before that, and isn’t this just me trying to ride the wave of the current strength in the freight market. It certainly isn’t, and I’m not saying now is the best time to jump in, but if you play the shipping market in a certain way, I believe you will benefit over the long run, even though other people’s views do vary. But as they say, there’s more than one way to skin a cat, however ghastly that saying sounds.

Now most producers will say they don’t need to have a ship, when all they want to do is come up with a lifting programme and sell FOB, what’s the upside for them? They nearly always say they don’t want to trade; don’t want ships turning up when they don’t have cargo, or five days after the cargo should have been lifted, maybe having to meet dates in far out places when their customers need the cargo delivered, but the ship and cargo can’t make it on time anyway. It’s understandable, and I appreciate the producer’s viewpoint, however, I do think the LPG world is in a unique stand-alone position in energy circles when it comes to freight, and also the world of LPG has dramatically changed over the last 6-7 years. Isn’t it time a few more major producers delved further into the freight market, of course the way they do it is important?

There are few parts of the tanker business where the freight portion makes up such a high percentage of the overall CFR price as it does in LPG. Take the FEI price today, standing around $450/ Mt, and freight from Houston to Chiba coming in at approximately $130/ Mt. That’s just under 30% of the total CFR price covered by freight. Even taking the shorter route from Ras Tanura to Chiba, we are only just under 18% of the total CFR price, with freight rates currently standing at circa $80/ Mt. Yes, there’s been times when the freight market has been on its knees while the product market has been strong, and these percentages can therefore vary, but the percentage has been strong for more years than it hasn’t. I was always taught during my early LPG career that freight was an integral part of the “deal” equation both from the perspective of the overall price, and for adding logistical flexibility. If you didn’t control the ship, then the upside was always going to be limited. Now I’m not going to get into the discussion here of trader tonnage versus traditional shipowners, nor the reduction of time charters being concluded with traders, that’s a separate discussion for another day.

My interest is focused on the biggest exporters of LPG in the world. Most of them seem to have a clear policy that they want to sell on FOB terms, and they don’t want to own or charter ships, especially VLGCs. Even with freight making up such a high percentage of the delivered price, it still hasn’t tempted producers to flock over to the shipping side and deliver their cargoes to their customers. But there have been a few that have dipped a toe or two into the market. The first that comes to my mind is Kuwait, who have operated a couple of ships in their programme for a number of years. More recently Qatar, of all the major producers, were the one that tried to break the FOB ranks by ordering VLGCs, at the same time as the development of their new export capacity, going back nearly ten years now. The four ships were the “Al Wukir”, “Bu Sidra”, “Lubara” and “Um Laqhab”. For a number of years, they were able to convince their customers, mainly the Japanese and Korean importers, to enter into agreements where product would be delivered CFR. But Tasweeq, as they we called in those days, were finding it harder to compete with the greater flexibility of timing, different sources, quantities, and propane/butane splits, being offered by traders also keen to supply CFR cargoes, not only from the range of Middle East FOB sellers, such as Saudi Aramco and ADNOC, but also from the new U.S. shale gas LPG exporter, increasingly aiming at customers in the Asian market.

In the last 5 years or so we have also seen Asian importers, with ships in hand, going to the U.S. looking for cargo. Astomos went on a significant investment programme, increasing their fleet above 20 VLGCs a few years ago, as both the Japanese and Korean trading houses increased their third-party trading activities as domestic imports shrank. The market was just not conducive for just enticing buyers to take CFR cargoes directly from the producer, as in the buyer’s eyes it meant little flexibility, especially as the likes of Tasweeq were concerned to get their vessels back to load. Therefore, any requests that might change a programme or delay the ship, were usually answered in the negative.

I fully agree that producers shouldn’t tinker with providing delivered cargoes, it just doesn’t suite them. But their rationale to at least consider it as an option, versus FOB sales, has always been in an attempt to gain greater control of their and their product’s destiny. Ten years ago, there was no real need to worry about control as exports were in the hands of very few producers and the importers in Japan and Korean buyers were locked-in, most would have said at the time forever. But the world has changed dramatically in the last ten years, and destiny is becoming more of a concern.

The saviour for Middle East producer has been the growth of the Indian market in recent years, reducing the need to compete with U.S. tons going to Japan and Korea, where U.S. tons were clearly infiltrating. But as volumes continue to increase, the confrontation zone will increasingly become one country – China! China will not hesitate to always seek the most competitive outlets, allegiance to producers is not something we would associate with Chines buyers, and why not, they aren’t as constrained as their neighbours in having to secure energy supplies pretty much at any cost. Okay there are a few distractions, namely the tariff war, but it’s only a matter of time before the battle for buyers will center on China, be prepared!

Whether it is Enterprise, Targa, ADNOC, Qatar or Saudi Aramco, their destiny is in the hands of the buyers they sell to on an FOB basis, who may come to the table arguing for supply diversification, but are primarily seeking to buy as cheaply as they can, and move the cargoes where they will pay the most. It is a clearing system of sorts. Some would say it’s tried and tested, but is it the best for the producers? I don’t think so, not now. We have seaborne volumes of over 100 million Mt, soon to be 110 million mt, and double the volume ten years ago. We have Enterprise inaugurating a 25-30% increase in capacity and all the other U.S. exporters are following, in some way or another. But this isn’t the way the major exporters should operate, not in my opinion, although I also understand that the financial set-up of the U.S. companies can be restrictive internationally. But they need to try and gain back some control in where their product will ultimately end up. They need to own/charter ships but then place them with FOB contract holders, have a stake in the industry and the destiny of the cargoes. They can decide then whether to increase their involvement or not. I think it’s already starting, Wanhua leading the way with deals of major co-operation with both ADNOC and Qatar, partnerships not just selling FOB. I think more eyes will be focusing on U.S. exporters, who need to spread their wings, or they will always have to face a queue with others standing  in front of them.