SIMON SAYS: Still looks as if there’s going to be a lot of LPG to lift, but on what?

Submitted by Simon Hill on Wed, 12/11/2019 - 17:00
Still looks as if there’s going to be a lot of LPG to lift, but on what?

As we come close to the start of 2020, both the production forecast, and the reality, jump ahead another year. Decisions have been made in advance to order new VLGC buildings, although with a lack of any real perceived urgency, and a stutter attributed to all the uncertainty associated with IMO 2020. We have discussed the reasons before, the long memories of the traditional ship owners for when rates struggled to cover operating expenses (OPEX), that has discouraged them from investing in new buildings on any scale at all. They know the sheep mentality of how new building orders push other ship owners to follow suit, and suddenly a future need, is then a future surplus. The traders, come shipowners, jumped into ordering new buildings a few years ago as a result of the ship owner’s strategy not to time charter ships out to traders, fearing they would end-up as competition with their own ships in the spot freight market. This move has pretty much dried-up, as the traders then went through a couple of years of a difficult market and poor results, so better to enjoy the returns on the ships they were already getting delivered, rather than push management for more. Japan and Korea’s appetite for new buildings has also fallen, as import volumes reduced the necessity and desire to build more ships than was needed to replenish older tonnage. China appeared to have the appetite and the resources, but the trade war has put a dampener on any significant new building expansion.

So, with only a few extra new buildings being announced in recent months, the big question is going to be whether we have enough in the pipeline to satisfy the growth in LPG production. Trying to predict LPG export volumes is not easy, as LPG is not the driving force in itself behind future production numbers, reliant on the financial pull of crude oil and natural gas as being the catalyst for growth. Then there are the secondary elements that can significantly impact numbers, such as OPEC cutbacks, or the growth of petrochemical and refinery complexes under one roof. The two key areas are the U.S. and the Middle East. Over the last 5 years exports, from the Middle East have actually grown from less than 34 million Mt in 2014 to just short of 40 million Mt this year. Now most of that growth has come from Iran, and this could well start to drop off if sanctions do the job, but we’ve discussed the fact on a number of occasions that buyers find loopholes, and we also appear to have turned the page on a very negative relationship between the U.S. and Iran, with prisoners exchanged and renewed optimism for further dialogue however difficult this process will be. I therefore believe that by 2025 we will see at least 43 million Mt of exports from the Middle East.

The rest of the world has been relatively stagnant over the same period. Asia Pacific, including Australia could well see 1.5 million extra volumes by 2025 being exported, taking the region to nearly 6 million Mt in 5 years. North Africa I see gaining an extra 0.5 million, mainly from new trains in Algeria and the return to the world stage of Libya. A similar increase of 0.5 million Mt out of West Africa is also likely, while Northern Europe will benefit from new developments out of the Norwegian sector of the North Sea and Russia, maybe to the tune of 0.75 million by 2025. With other regions basically treading water, that leaves export volumes out of the U.S., which can be looked at in a very complex way or as simplified a way as possible. For me shipping has to be looked at in Mt, metric tons, although cubic metres and barrels will interchange along the discussion.

From the graphs I have seen floating around the industry, I feel comfortable to be saying that the range of forecasts for export availability out of the U.S. for the next 5 years, up to the start of 2025, suggests somewhere in the 500 – 750 M Bbls/ d increase in exports from where we are today. It’s LPG, so I tend to work on the basis of 80% propane and 20% butane exports, and apply division by 12. Therefore the increase will be between 42,000 Mt/ d and 62,500 Mt/ d. This means at the beginning of 2025 there will be an additional export volume of between 15.5 million and 22.8 million Mt. If crude oil prices for WTI remain around $55/ bbl, then we are talking pretty much the mid-point, around 19 million Mt of LPG exports. Now the steepness of the growth curve is slightly higher in the first half of the period, but is pretty much as consistent as any 5 year forecast could be.

Excluding the U.S. production, the rest of the world  is likely to increase by a moderate 6.25 million Mt but it’s still significant, while U.S. production is on course to hit just below 19 million Mt of extra exports by 2025. Now you can apply any sort of yearly calculations, but for me the key is going to be what the numbers will look like at the start of 2025. I apply a basic rule of thumb that a ship operating out of the Middle East / Asia Pacific will most likely be able to fit in 10 voyages per annum, while a ship operating out of the U.S. is likely to be able to fit in 5.5 voyages per annum.

So the 6.25 million Mt outside of the U.S. can be divided by 460,000 Mt, which is the total for 10 voyages, and results in an extra 13-14 VLGCs required by the beginning of 2025. For the 19 million Mt likely to be exported out of the U.S., divided by the 250,000 Mt covering 5.5 voyages per annum, results in 76 extra VLGCs that would be needed. The total would be 90 vessels before any ships are scrapped or find their way into floating storage operations.

This might only be a rule of thumb and I’m sure there are many more sophisticated models that can be used, but whether they are any more accurate, I’m not convinced. The U.S. production is a major element of any forecast and there will be those who will come up with higher and some with lower calculations. As I always say, you pay your money and you take your choice. Tomorrow I’ll delve into the ship side, and what the new building orders are so far, and what we might see in the future. In the meantime the owners are just going to carry on enjoying a bumper period.