SIMON SAYS: The ship owners are playing a cool hand in the new-build poker game!

Submitted by Simon Hill on Wed, 10/16/2019 - 17:00
The ship owners are playing a cool hand in the new-build poker game!

I’m really enjoying looking in on the LPG market from the perimeter fence for once, and there’s no bigger question on my mind than, when? The “when” relates to when are we going to see somebody in the LPG shipping market really break the new building ice, not just crack it in a couple of places. The gauntlet has been thrown down, but will anyone pick it up? They say the wearer has the power to do whatever they want, I don’t see anyone out there who wants to take on the challenge, do you?

I admit the best time to order a new build is at the bottom of the market, and I’ve preached this in previous blogs earlier this year, I have to admit that it was maybe not quiet at the time of the bottom (see SIMON SAYS, here). That’s both the bottom of the vessel’s likely cost ex shipyard, and the floor of the future freight curve. But that’s been and gone, with very few players having got on the newbuilding conveyor belt, as they seemed to fear falling off if they jump on now, as the conveyor belt is moving rather fast.

Now, a lot of players who would traditionally order ships, are claiming that the choice of propulsion for any new vessel in the future, is a far too risky a decision to make at the moment, let alone to then decide to put in the new build order itself. IMO 2020 is racing towards us at breakneck speed, and although most owners have decided what to wear for the New Year’s Ball, the post discussion still has a few questions to answer. I think everybody pretty much believes that fitting a scrubber is a short-term solution, i.e. it needs to be fitted immediately, and paid back early, or it might become a future financial burden. In addition, there is a lot of focus today on environmental responsibility and the open- and closed-loop argument is still potentially a very hot potato.

There’s already just under 20 ships with scrubbers on board, currently trading out of 280 Very Large Gas Carriers (VLGC) on the water, add to it a further 25 newbuildings with scrubbers to be fitted, due before the end the first quarter 2021. Then there are those vessels that will retrofit scrubbers shortly, and most by early in 2020. But the last scrubber will have been fitted in the early part of 2021, and the emphasis then switches over to dual-fuel engines. So, we have about roughly 55 vessels with scrubbers before the end of 2020. The reason for quoting the numbers, is that it also shows that the ship owners have their thoughts on a specific pay-back for scrubber investments, made for assets on the water or on order. An open loop scrubber costs around $2.5 – 3.0 million, with the closed loop version coming out a little more expensive, but lead times are the concern, and can be over 2 years, making the investment questionable. Similarly, the ship owner must also decide if he wants to take the dual fuel engine option at a cost of $5.5 – 6.0 million on a new building, but about $9 million to retrofit to an older VLGC.

Other than propulsion and scrubber fitment, the base cost of a VLGC is hanging in around the low $70 million basis a Korean yard, more for a Japanese yard, and less for a Chinese shipbuilder. The old heads, of the ship owning world, will say that you must always look to buy at the cheapest build price, well we have probably gone up $4 -5 million, from the recent lows achieved by Petredec at the Chinese yards. Okay, it’s maybe not at record lows today, but it’s surely not a deal killer either? But yes, owners are pre-occupied with making IMO investment decisions, not whether to go the whole way and order a new building.

Maybe prospective owners are still trying to decide whether to go bigger, or to go the way of the Panamax, albeit with more cubic meters (CBMs) than ever before. I’ve always felt that shipyards are too keen to just get another ship ordered against a previous specification, I can understand it, but to me it’s not dynamic enough. In addition, ship owners tend not to be the pioneers when it comes to assessing what the trade actually needs, and the type of ships required, as, with respect, they have not been at the cutting edge of the trading end of the industry. They also prefer to play a position in the middle of the park, using the yard’s design, and then sell it to a prospective charterer for a long enough period to secure the time charter and put in the new building order. I know I am taking a general line and there are examples where brokers and owners are trying to push for certain improved designs based on the seaborne trade of the future, but in my mind there aren’t enough. I was with Equinor for a day or so a few weeks back, and they did think through a lot about, not just the design of the two ships they were ordering, but also how they would fit into their future trading blueprint. I’m basically saying that the industry could do with a fresher approach to ship development, ship owning responsibility and maybe appreciate their sensitive side a little more, i.e. the interaction with the sources of supply and demand that actually underpin the ship owning sector.

Maybe the reason we are not seeing more ships ordered, is that the ship owners don’t believe that the recent growth in exports, especially from the U.S., will continue. Now I’ve been maybe too bullish on U.S. volumes in the past, but even with the uncertainty over the shale producer’s “access to finance” model, the move away from fossil fuels and still some future takeaway issues, there is considerable NGL growth still to kick-in. My worry is that we have export constraints out of Iran and Saudi Arabia in the Middle East, capacity constraints out of the U.S. Gulf, and still we have time charter equivalents of $2.2 million per month. Yes, there are 4 more new VLGCs due in the balance of this year, 22 new buildings due in 2020, 10 in 2021 and 3 in 2021. That’s 39 in total, but we have 20 ships operating in floating storage, and they average over 20 years old. Their lifespan will be maintained for as long as possible given current market numbers, but older less economical VLGCs could come under pressure as the spread between MGO and HSFO, or any environmentally low Sulphur option, grows following IMO 2020.

So, back to our original question, will anybody break ranks and order more VLGCs? The traditional ship owner, if I can call them that in this ever changing world, the likes of BW, Dorian and Avance, say they are keen to grow their fleet, but they want to do it through purchasing second-hand ships or purchasing cheap shipping shares. I think we all know that this is now unlikely, as both valuations are up in today’s market, but new builds are still holding, in and around $70 million+. What’s clear is that the main ship owners are keen not to see other parties build ships, encouraged by the main players making new building orders. Also, by not promoting the time charter of their vessels to traders, it meant the traders went to build their own tonnage, Petredec and Geogas have been there already, but in stepped Vitol and Trafigura. I think we expected more trader vessels to be ordered in recent months, but LPG trading losses suffered in recent years has clearly put a brake on that happening.

The Japanese trading houses who have previously supported new buildings, as part of growing the Japanese fleet, are now reluctant to replace all their older tonnage, as they tighten their overall LPG  business. Losses have been a factor here as well. So, we are left with the Chinese shipping companies, but their financial status is probably not the strongest, and there is caution over the current U.S. / China tariff war. The largest Chinese importer, Oriental Energy, also appears to be less expansive in their future trading and logistical involvement in the LPG sector, which must also mean supporting the Chinese shipping sector.

We are still pretty much where we were, and with every month that goes by, especially at these very high freight numbers, the call is for the market to drop away, but without more new buildings, I’m failing to see this happening any time soon. As we said yesterday, time is money in the shipping world, and ship owners feel that by the time the next ship they order is delivered, then we will be seeing a vastly different market. I don’t disagree, but whether the market is back down at January’s levels again, I’m not really so sure.