BW LPG, a unit of shipping giant BW Group, expects the freight market to be even more volatile next year on increased deliveries of new VLGCs, a sharp increase in export capacity and with energy prices closely impacting production and demand growth, it said Thursday.
The company expects US export terminal fees and freight rates to adjust more frequently, prompting greater volatility versus the last two years, in order to facilitate trade and accommodate the continuous flow of incremental export volumes, which is estimated in the mid-20 million mt in 2016.
The third quarter of 2015 has seen an uptick in newbuilding activity in the global VLGC sector, with a total of 11 newbuilding orders placed in September and October, many backed by long-term charters, BW LPG said in its Q3 financial report.
“Six of those orders were 78,500 cu m Panamax VLGCs, capable of transiting the existing Panama Canal channel. BW LPG estimates a maximum of three Panamax VLGCs are required to service US LPG exports to West Coast Latin America, with the balance expected to be deployed for trading to the East,” it said, adding that lead times for newbuilding deliveries are towards the end of 2017 in South Korea and early 2019 for Japan.
The expanded Panama Canal is expected to be ready by mid-2016, industry sources said.
Shipping sources have said that, as most of the 33 newbuilding VLGCs slated for 2015 are already delivered — with more due by year-end and some in January — freight rates have dropped from highs near $100/mt.
Another 54 newbuildings are expected to be delivered next year and around eight in 2017-2018, shipping sources said.
In terms of achieved freight rates, BW LPG said Q3 was comparable to the year-ago period, though with increased volatility.
Rates averaged $129/mt on the major Persian Gulf-Japan route in July before retreating in line with seasonal patterns to average $103/mt through the quarter. Prices have since slid to around $60/mt currently, helping to reopen the US-Asia propane arbitrage, shipping source said.
BW LPG said the Energy Information Agency’s forecast for total LPG production calls for growth of 8% in 2015 and 6% in 2016. Based on this, shipping analyst Arctic Securities said that BW LPG sees US LPG exports for 2016 having “settled in the mid-20 million mt range.” This fits with Arctic Securities’ current estimate of 24.7 million mt.
US-ASIA ARBITRAGE REOPENING
BW LPG said that propane price spreads between Asia and the US had not been wide enough for arbitrage cargo flows in Q3. After averaging $192/mt in June, US Mont Belvieu propane prices extended their seasonal upswing in Q3 in anticipation of heightened domestic US heating and crop drying demand.
US propane inventories also built up past 100 million barrels, reflecting the increasing connectivity of Mont Belvieu to the pipeline network, it said.
Crude oil prices and Asian naphtha and propane prices, fell over the corresponding period, leading to fewer arbitrage opportunities throughout the quarter, it said.
“West to East volumes decreased by 12% quarter on quarter as Middle Eastern cargoes fulfilled a greater proportion of Asian demand, while US volumes were predominantly placed in Latin American and European markets,” BW LPG added.
However, with the recovery in Asia prices since last month, even as US and European prices turned relatively softer, traders said the US-Asia arbitrage had reopened and a number of vessels were fixed for December loading and due to arrive East in January.
And trade sources said the Asian market continued to be supported this week by buyers seeking to hedge their arbitrage positions.
“The number of ships loading isn’t changing but hedgers have decided to hedge, more on deferred periods than only front month, that is January/February and all the way through 2016,” one trade source said Thursday.
BW LPG said Asian propane and naphtha spot price spreads softened through the quarter to average minus $31/mt, “weakening LPG’s cost advantage over naphtha in the price-sensitive (petrochemical) cracking sector.”
The propane/naphtha spread has even flipped to a premium as wide as $12.5/mt on November 5 and has held at premium levels since, according to Platts data.
BW LPG posted Q3 time-charter earnings of $181.7 million, up 14% year on year, operating income of $133.1 million, up 22% from a year ago and net profit of $106.2 million, up 21% on year.
The company also reported spot rates at $103,900/day in Q3, above Arctic Securities’ estimate of $95,000/day. BW posted average time-charter equivalent for contract of affreightment, or COA, of $48,500/day, above Arctic Securities’ estimate of $37,300/day.