Asia LNG Demand Boosts Tanker Orders

Orders for liquefied natural gas tankers are surging with new LNG supply from Qatar and Peru and a tripling of day-rates for such ships now pointing to peak demand in 2014-15 after years of poor sales.

Expansion has been spurred by demand from Norway, Sweden and Greece which has rebounded in the past 3-6 months after a slowdown in the last decade as shippers sense business opportunities from escalating day-rates.

New LNG supply from Qatar and Peru has led to greater demand for product from buyers in Asia and South America, stretching the capabilities of an ageing fleet, putting upward pressure on rates and squeezing availability as tankers are tied to these longer routes.

Spurring day rates are LNG spot prices in Europe at $9 per million British thermal units (MMBtu) versus $15 in Asia.

Troubled times for the nuclear sector after Japan’s March 11 earthquake and tsunami have also put LNG in the spotlight as a replacement fuel, and that has further reduced tanker availability.

Day-rates have tripled to $110,000/day since mid-2010 as a result, with further increases expected later in the year. Swelling orderbooks at South Korean shipyards set the stage for solid expansion of the LNG fleet in coming years.

Yet even the current orderbook of 56 units is not enough to plug the gap between supply and demand.

That’s partly because dozens of ageing tankers are nearing the end of their productive lives.

Shipyards are said to have hit capacity for 2013 delivery, with mounting orders shifting focus to 2014/15 which is seen as the point of peak demand.

“LNG shipping fundamentals on near- to mid-term look very good,” said Michael Rowley, managing director the LNG shipping business at Mitsui OSK Lines. The firm operates about 20 percent of the global fleet.

“The shipping demand trend is upward — I will remain positive for the next 12-18 months.”

BIG AUSSIE EXPANSION

One risk to the rosy outlook is delay or cancellation of a hefty list of planned LNG projects, especially in Australia.

“As long as scheduled projects come on stream, then there should be plenty of demand even with the 20 or so speculative orders out there,” Rowley said.

Vast new production plants dotted across the Australian coastline are set to come on stream in 2015 to employ an expanded tanker fleet.

Provided that pans out, Australia in a single leap will more than double output to 42 million tonnes/year, virtually guaranteeing continuing bullish rates.

In excess of 40-45 vessels are needed to transport Australian volumes projected by 2015, compared with just 5-10 carriers currently linked to those projects, according to analysis by Arctic Securities.

In a sign of that future demand, South Korea announced long-term agreements on Wednesday worth $84 billion with Royal Dutch Shell and Total to buy gas from LNG projects in Australia.

LNG demand continues to improve despite a darkening economic backdrop, a situation almost certain to curb crude oil and European gas burn.

That’s partly because of unflagging demand from Asian and South American economies as domestic power consumption soars.

Interest in LNG shipping has been further heightened by the appearance of major lenders willing to underwrite these forays, while diminishing demand for dry bulk and other freight lines has helped redirect investment to the latest boom market.

Underscoring the glum state of the crude oil tanker market, the chief executive of Frontline, the world’s top independent tanker operator, told Reuters this week that confidence there had hit an all-time low.

Banks are betting hard on the revival in fortunes for the LNG shipping industry, to the extent of even backing speculative punts worth hundreds of millions of dollars.

These are deals where the planned tanker has no assigned route or guaranteed returns from a long-term contract.

Norway’s biggest bank DnB NOR is in talks to finance up to $4 bln of new tanker builds in the six months to December 31, 2011, in part due to a rise in the number of speculative orders.

Confirmed new build orders by shipyards have risen in recent months, as established Greek and some Scandinavian shipowners move into LNG transport for the first time.

The latest deal by George Economou’s Cardiff Marine group for four LNG tankers takes the number of vessels ordered by Greece-based owners since the start of the year to 21. Many of the 25 recent orders are speculative punts designed to reap the benefits of increasingly fat chartering returns on the spot market, where rates show little sign yet of running out of steam.

Swedish shipper Stena Bulk sees rates exceeding $130,000/day this year before climbing further on the back of tighter availability towards the middle part of the decade.

In another sign of change, banks are also part-financing the speculators, which is a far cry from the peripheral position they occupied for much of the last decade.

Little downside is expected from hefty new build even, as much of that is replacing ageing ships coming out of service.

“The Greeks are investing in shipping because rates are rising and ageing ships face retirement as new product comes to market,” reckons one shipping source.

Between 55 and 62 tankers — nearly a fifth of the global fleet — face retirement in 2014 through age and on the back of tighter safety and environmental controls which make them less competitive to operate.

Tanker operators are preparing to manage the impending capacity crunch by converting aging carriers into more profitable floating storage and regasification units and, where possible, reactivating defunct tankers.

At heart it is the sizeable spread between Europe and Asia that is now driving demand for new shipping capacity.

As long as traders see the benefit in transferring Atlantic production eastward shipping will remain scarce.

Nigerian loading programs increasingly serve as the best conduit for transferring Atlantic volumes to Asian buyers given the $6/MMBtu spread that is up for grabs.

(guardian)