LNG carriers provide bright spot to gloomy shipping sector
The market for LNG carriers has been one of the few bright spots of an otherwise severely depressed shipping sector in recent years.
The impetus for this has been a 10 per cent annual growth rate in demand for LNG over the past decade, a level of demand that surpasses that of almost any other product transported by sea.
LNG production is set to increase further with global liquefaction capacity expected to rise by a third from the 300m cubic metres (287m tonnes) in operation today, according to data from DVB, the specialist German transport bank.
The structure of the LNG carrier market has added to the mismatch between supply of and demand for these specialised vessels.
Most of the global LNG fleet of just under 350 vessels are tied to contracts of 15-25 years. Celine Labelle, a shipping analyst at DVB Bank in Rotterdam and a specialist in LNG, estimates that about 55 per cent of all vessels are tied up to long-term contracts, in essence turning them into a key part of the infrastructure of the liquefaction plants where they act as the floating, mobile pipeline to the destination markets.
But those long-term contracts have not led to stability in the market, in large part because there is a two to three-year lag between ordering a new ship and delivery. This leaves the owners and operators of the vessels exposed to the regular delays that occur in bringing new multibillion-dollar liquefaction plants on-stream.
The mismatch between the availability of shipping capacity and LNG output has resulted in a lumpy market in recent years.
Before the economic crisis, charter rates were typically running at $65,000 to $70,000 a day, compared with break-even costs of about $60,000. But a black spot came in 2009, when the new ships arrived just as the economic downturn bit and a number of large liquefaction projects were delayed. As a result rates dropped to about $30,000 a day.
That dip left shipowners, already smarting from the wider crisis, reluctant to order new LNG carriers, resulting in shortfall in capacity as liquefaction projects came online in 2011 and 2012. Last year the demand for LNG carriers was so high that spot charter rates peaked at $150,000 a day.
The market has come back sharply this year with rates now at about $90,000 and the expectation is that they will stabilise around the $80,000 to $85,000 level over the next five years.
“There have been some big orders placed in recent years so it looks like the market is becoming more normalised,” says Halvor Sveen, managing director of Maritime & Merchant, a boutique Norwegian bank that is due to start trading next year.
However, much will depend on the discipline among the owners and operators of LNG vessels with 103 new ships on order.
The reason there is more optimism among analysts that LNG will avoid the usual exuberance of ship owners to pile en masse into a profitable sector is the high barriers to entry.
Not only is the cost of the ship prohibitive – typically $200m for a 160,000 cubic metre vessel – but the strict safety regime in place around operating such vessel restricts the number of operators in the market.