Monday, 31 December 2012

Gas tanker market faces multi-year downturn, experts warn

The gas tanker market faces tough challenges over the next few years, a Reuters report reveals. Amongst the reasons analysts mention for this pessimism are delays in Australian gas projects, an oversupply of tonnage and the fact that not enough of the tankers in the market- or those entering it- are fixed long term. The only saving grace seems to be that analysts expect gas tankers to earn more than other commercial ships till ‘at least 2016’, even as they forecast a multi-year downturn, followed by a gradual recovery, for these ships.

The think not so long ago was that gas tankers, especially LNG tankers, would continue to do well for some time on the back of rising demand, particularly from Japan after the devastating Tsunami last year. The sudden spurt in LNG demand then led to a rush of newbuild orders for LNG ships- these were supposed to do well in a world that was looking for cheaper and cleaner fuels. Fleet capacity was stretched as LNG routes became longer. Unsurprisingly, rates shot up, ‘quadrupling in the years since 2010’, the report says.

However, there has been a perceptible and subtle shift in the market in recent weeks. Rates seem to be levelling off, even stagnating. Analysts expect the rates will actually decline further from here until at least 2014 or 2015. 

 “If you look at the pure fundamentals, there is some ground to think there will be oversupply,” a source from a major LNG shipping brokerage is quoted as saying.

Experts say that the LNG market can get choppy very quickly. In the absence of long term charters, they say, a large number of vessels in the market will totally depend on spot rates. As many as a third of the approximately eighty five ships ordered since 2011 (at a total cost of around $17 billion) fall into this category, brokers warn. 

To add to these tanker owners’ woes, LNG projects are suffering inordinate delays, especially in Australia. This will be a double whammy for many tanker owners, analysts feel- the drop in overall freight demand coupled with particular pressure on spot freight rates may well prove to be crippling, especially if brand new vessels are left unutilised. Although brokers are understandably chary of predicting rates, some say that daily hire rates could drop to as much as $100,000/day in 2015; this, when rates earlier this year had touched $160,000/day.

“In 2013 there are still a number of LNG vessels delivering that don’t have employment yet. Ten out of the 25 vessels expected next year haven’t been fixed,” the same broker said. “In 2014 the situation will be even worse.. more than half (of new LNG ships) won’t have employment.”

The good news for LNG tanker owners is that they can make money even at lower rates than those forecast, something their friends in other trades can only envy. Says and expert from Arctic Securities, talking to Reuters, “Even if rates come down to $85,000 a day, investors are still looking at a 12 per cent annual return.” In contrast, a five-year charter returns 7 to 8 per cent, and a VLCC returns 8.5 to 9.5. “Beyond 2015, LNG tankers will earn comparatively less “mostly due to the fact that dry bulk and tankers will rise more than LNG rates”, the Arctic Securities broker said.

Another piece of good news- LNG owners seem to have learnt from the mistakes made by dry bulk and tanker owners, whose greed for tonnage has led to the present oversupply situation. Talking about LNG newbuilding, one expert said, “Last year there was a lot of ordering, but this year that has significantly reduced.” 


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