Thursday, 26 July 2012

LNG ship-owners may continue to rake it in

Interesting things are happening in the LNG market, which a wide swathe of analysts expect will continue to do well this year. The plummeting demand from Europe has coincided with the rise in demand for LNG in the East, notably in Japan, what with that country struggling to replace nuclear energy after last years tsunami and the consequent Fukushima nuclear plant shutdown. The situation has become magnified with gas shipped to Europe from Qatar now being shipped back to Japan, going back past the region of its origin further east. Because of this diversion, LNG is travelling an additional distance of close to ten thousand miles. In the process, LNG rates are threatening to increase sharply.

A Bloomberg report quotes investment management and research outfit Sanford C. Bernstein & Co saying that European demand will drop by 20 percent in 2012; the year will simultaneously see a consumption rise in Asia of 11 percent. A survey of analysts by Bloomberg says that tanker rates will rise 54 percent this year. 
Demand, especially from Japan, is expected to be huge. Japanese gas prices are 44% higher than European prices; Japan is operating just two of its 50 nuclear plants at present, and there is a severe shortage of ships to carry gas to the country, says the International Energy Agency.  In addition, said a broker to Bloomberg, the situation seems to be exacerbated by the fact that LNG imported into Europe is under long-term contracts that 'do not often allow a change of destination'.

Shipping costs, struggling at  $36,000 a day two years ago, have already touched $150,000 in June this year, and are on track to average $152,000 this year, the Bloomberg survey said. 

Of course, there are some clouds around the silver lining. First, demand may fall significantly, some experts warn, especially if China slows down due to the European contagion. Then there is the possibility of capacity increase; LNG new builds may spurt as owners try to exploit the market. This is already happening to a small extent; 22 additional LNG carriers are expected to be in the water by next year, and IHS Inc says that outstanding orders at shipyards are equal to 22 percent of existing capacity.

LNG ship-owners are hoping, however, that the increased tonne-mile gas scenario- thanks to diverted gas- will continue for sometime, supporting the market even further. This, coupled with the normal spurt in demand in winter, they think, will keep the LNG market buoyant for quite some time.  

In any case, things look rosy in the short term. With a 15% increase in demand for LNG tankers anticipated this year, LNG ship-owners are in a comfortable place at the moment, in stark contrast to the rest of the industry.

“Re-exports from Europe are propping up this market,” analyst Erik Nikolai Stavseth told Bloomberg. “They double up miles for cargoes.”


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