China was the biggest importer of the USA’s surplus LPG production, but this trade has fallen victim to the ongoing trade dispute between the two countries, with a consequent impact on VLGCs
According to a consensus of data from Clarksons Research Services, IHS Markit and the World LPG Association, global LPG production reached 310M tonnes in 2018, an increase of 1.4% over the previous 12 months. Based on this data, global LPG production has increased by over 50M tonnes since the start of the decade.
Global LPG production is expected to surpass 350M tonnes by 2024 according to data from IHS Markit, driven by the dramatic ramping up of LPG production from US shale gas and tight oil sources.
In the longer term, LPG production from shale oil and gas is expected to level off in the late 2020s, when production is anticipated to plateau. This will be the main source of LPG production growth, with refineries globally not expected to boost LPG production by any significant amount.
Domestic US LPG consumption is also expected to remain flat. The long-term storage of high volumes of LPG is not a significant factor in the LPG production/consumption equation and it is not an unreasonable assumption that US exports of LPG will increase as the domestic surplus grows.
This surplus feeds into the global demand for bulk LPG use in commercial and residential properties via gas bottles, with chemical feedstock the second largest usage. In the longer term, another driver of global LPG trade will be as a replacement for biomass as a source of energy in rural Africa and Asia. It is expected that some biomass will be commercially converted into domestically produced biogas, but this will make a relatively small dent in the growing demand for energy in those rural areas. The bulk of the demand for energy will be met by bottled gas, commercially provided by bulk importers of LPG.
In China, LPG is likely to become a replacement for domestic and commercial coal. In 2016, the residential and commercial use of coal was 106M tonnes of oil equivalent.
These are the short- and long-term drivers behind the seaborne LPG trade. The largest operator of gas carriers by market capitalisation and capacity, BW LPG Ltd, estimates that seaborne LPG movements in 2018 reached 95M tonnes. It reports that the Middle East was the largest exporter of seaborne LPG controlling, 41% of the trade; the US was the second largest exporter with 34% of exports.
The key factor in shipping is tonne-mile demand of the work done by the fleet, which is measured in tonnes of cargo (using deadweight as a proxy) multiplied by the distance travelled while laden: “The longer the sailing distance, the more valuable the trade is to the shipping industry, with demand for shipping measured in tonne mile rather than just tonnes,” explains BIMCO’s chief shipping analyst, Peter Sand.
According to VesselsValue’s Trade module, the total LPG tonne-mile demand in 2018 was 661Bn dwt nautical miles. It notes that by far the largest demand for LPG carriers of all sizes in 2018 was on the Gulf of Mexico to Far East route, which absorbed 116Bn dwt nautical miles.
The bulk of the demand on that route in 2018 was serviced by the VLGC fleet, which covered 115Bn dwt nautical miles. The major destinations receiving LPG in the Far East region are Japan, South Korea, and China. China has seen dramatic growth in LPG imports, but more importantly, has been a significant pull on the VLGC fleet.
VLGC US Seaborne Exports to China - ton-mile demand (Bn dwt nautical miles)
*27 June 2019.
In theory, after the previous two years, VLGC demand on the US to China route in 2018 should have been in the region of 40Bn dwt nautical miles, but the trade war between the US and China resulted in a steep drop in tonne-mile demand to 14.3Bn dwt nautical miles. At the mid-point of 2019, VLGC trade between the US and China is almost non-existent.
China appears to substituting long-haul VLGC imports from the US with cargoes from its Middle East partners UAE, Qatar and Kuwait, and supplementary supplies from Angola and Nigeria. These are relatively short-haul routes, which will have the effect of freeing up VLGCs and increasing the supply of vessels able to work.
The VLGC sector forms the main long-haul portion of the gas carrier (non-LNG) fleet. The total gas carrier fleet at the end of 2018 consisted of 1,450 vessels, with another 74 vessels on order for delivery through 2022. The current live LPG fleet had a total capacity of 34M m3. Vessels in the fleet range in size from approximately 100 m3 to approximately 88,000 m3, with approximately 47% of the vessels in the worldwide fleet less than 5,000 m3 in size. The average age of the global LPG fleet is 15 years old.
Ownership of the fleet is less fragmented than other elements of the commercial bulk shipping sector, but does not yet have the level of dominance seen by certain owners/operators in the LNG sector. LNG owner/operators are active in the LPG sectors, too; as in the LNG sector, LPG and chemical gas shipping is a long-term industrial-shipping function requiring high capital assets. These requirements are met by accessing the public markets and the need to access large volumes of capital. Nearly all the major owners and operators of LPG carriers are public companies or divisions of state enterprises.
Publicly listed largest owner/operators ranked by market capitalisation
BW LPG controls a fleet of 49 VLGCs and LGCs, which is approximately 15% of the current live LPG fleet. According to the company’s financial results, in 2017 its VLGC fleet achieved an average earning per VLGC of US$18,600/day (versus a Baltic Exchange-reported spot rate of US$13,500/day). In 2018 the headline rate fell slightly to US$18,400/day (versus US$17,300/day). In 2018 the figures were much closer at US$15,100/day versus a Baltic Exchange-reported US$15,000/day average for VLGCs.
At the other end of the scale are niche companies like Anthony Veder. Further bolstering its position in liquefied gas shipping, the Rotterdam-based shipowner is set to take over the commercial management of five gas carriers of Chicago-based GATX Corp.
With this transaction Anthony Veder further strengthens its position as a liquified gas shipping company, with a fleet of 38 ethylene, LPG and LNG carriers.
Better known for its rail business, GATX Corp has 85% of its US$8Bn in assets in rail car leasing operations in the US, Europe and Asia. But GATX also owns American Steamship Lines, the largest US-flag operator on the Great Lakes, with a fleet of 11 self-unloading ’Laker’ vessels that carry iron ore, coal and limestone. Through Rolls-Royce Partners and Affiliates, GATX is also the largest lessor of Rolls-Royce spare aircraft engines.
The gas carriers were previously part of the Norgas pool and will be renamed using Anthony Veder’s traditional appellation, Coral. Three of the five vessels will transport LPG and petrochemical gases such as ethylene. The other two gas carriers, of 10,000 m3 capacity each, will transport LNG.
Anthony Veder chief executive Jan Valkier said: “Expanding our fleet with these five combined gas carriers is a great opportunity with which we can offer our customers even more flexible services. With the addition of the LNG carriers we boost our LNG trading fleet to 10 vessels in sizes between 5,800 m3 and 30,000 m3.”
Chemical Gas: a growing market
Navigator Holdings was one of the first public companies to own and operate large ethylene carriers, and this is still one of its main income streams today. The company operates the largest fleet of specialised handysize LPG vessels (15,000-24,999 m3) but is probably best known for its fleet of handysize ethylene capable (37,000-38,000 m3). These were built to take advantage of ethylene production coming online in the US.
In 2018, total US ethylene production at the two operating units at Exxon’s Baytown plant and Chevron’s Cedar Bayou plant equalled 3M tonnes/year. By the end of 2019 US production will have doubled to 6M tonnes/year; by the end of 2022, US ethylene production could reach 12.6M tonnes/year. Navigator aims to be at the forefront of US ethylene exports and to this end, it has invested alongside Enterprise Product Partners in the first large-scale ethylene terminal in Texas.
The company has recently added the transport of ethane to its strong presence in the ethylene trades. While ethylene is a key building block in the manufacture of petrochemicals, ethane is an optimum feedstock in the production of ethylene. The surging output of shale gas in the US is rich in ethane.
Navigator Gas brought economies of scale to ethylene transport 20 years ago when it introduced the largest semi-ref gas carriers ever built. The company’s recently introduced ethane carriers are, similarly, among today’s largest semi-ref ships.
One of the company’s ethane-capable ships, the 35,000 m3 Navigator Aurora, has recently had its dual-fuel main engine converted to enable the burning of ethane. The vessel is fixed on a long-term time charter to Borealis for the carriage of ethane from the Mariner East terminal near Philadelphia on the US east coast to the chemical company’s ethylene cracker at Stenungsund in Sweden, for use as a feedstock.