VLGC rates in steepest freefall in two decades, hopes on return of Chinese LPG trade

SINGAPORE — Very Large Gas Carrier, or VLGC, rates extended their sharpest freefall in around two decades to seven-month lows at $37/mt, S&P Global Platts data showed, with more short-term downside seen, on low shipping activity and a closed Western arbitrage, shipping sources said Feb. 16.

But some recovery may be on the horizon with China's return from long holidays and the continuing cycle of vessels in dry docks for repairs, sources added.

Middle East to Japan freight rates have been plunging since touching more than five-year highs of $119/mt over Jan. 13-14, as the availability of trader vessel relets also piled on the pressure.

The previous steep uninterrupted plunge in Middle East-Japan rates was between July 16, 2015 at $136/mt and Sep. 1, 2015 at $65.5/mt, Platts data showed.

VLGC rates touched near two-year lows at $23.5/mt on June 23, 2020, Platts data showed.

In contrast, rates recorded an interrupted rally over March 3, 2014 at $38/mt to $133.5/mt on Apr. 28, 2014. Freight then surged to records of $144.5/mt on July 23, 2014, driven by the rush of US LPG shipments to global markets, at the onset of the shale boom and severe shortage of VLGCs.

Since then, a total of 301 VLGCs are on water, with two on the orderbook and 19 delivered in 2020, including two in Q3, BW LPG said in its quarterly report. For 2021, 19 VLGCs are on the orderbook, with another 11 in 2022 and five in 2023.

"Shipowners will need to accept the market and get their vessels going, or wait for better times. If such is the case, more vessels will pile up in the US and the East, and rates will take longer to recover," a shipping source said.

"Drydocking is still in full force this year and I don't think it will take too much activity in the market before the rates go back up to healthy levels."

Houston-Japan rates fell to $80/mt between Feb. 4 and Feb. 8, the lowest since July 23, 2020, before recovering to $83/mt over Feb. 9 -12, Platts data showed.

"The Western premium over the East has grown over recent weeks, incentivizing owners to ballast their ships West, but the line-up of H2 March US Gulf availability is starting to look worryingly long from an owners perspective," brokerage Gibson said in a Feb. 11 report.

Drydocking

Ninety VLGCs are slated to be in dry docks for special surveys in 2021, of which up to 46 are planned for the first quarter, Grieg Shipbrokers said, continuing the busy dry-docking of LPG vessels seen over fourth quarter 2020.

Some of these vessels were also up for upgrade, keeping them out of trade for weeks, Grieg added.

Market sources said the Western arbitrage is closed due to falling prices in the East, where heating demand has waned with the end of a harsh North Asian winter, while the US is grappling with icy weather and power shortages.

"Mostly because FEI [Argus Far East Index propane swaps] is dropping, the arbitrage is closed; Saudi cuts on production -- all this has of course a negative impact on shipping. Traders rather wanting to relet their vessels rather than using themselves is another reason why rates keep coming down," the shipping source said.

The recent closed arbitrage and disruptions at the Houston Ship Channel due to thick fog have prompted cancellations of 10-11 LPG cargoes loading in February from the US to Asia, which will lower US cargo arrivals to Asia to 1.6 million mt in March from 2.3 million mt in February, market sources said.

"The freeze-off in Texas could send LPG prices rising and curtail some of the US LPG exports to Asia. The delay in loadings could be further bearish for the already depressed VLGC freight rates," according to Platts Analytics.

"The current freeze-off is coinciding with China's return to the LPG market post-holidays. If there is an urgent need for stock replenishment in China, we would see an uptick in Middle Eastern loadings. However, if China can comfortably draw on stocks, the freeze-off is likely to delay China's return to the LPG market and the arb re-opening," Platts Analytics added.

H2 March delivery propane was assessed at $578/mt CFR North Asia Feb. 15, recovering from a two-month low of $545/mt Feb. 10, Platts data showed, also on expectations of Chinese PDH plants returning end-March from maintenance.

The market is anticipating Saudi Aramco to announce another round of cuts this week in its acceptances of March-loading term nominations after doing so for February nominations, following its decision to curb crude production for February and March under OPEC+ commitments.

However, Qatar Petroleum and ADNOC announced acceptances of March-loading nominations without cuts and some delays, along with a couple of Middle Eastern spot tenders, which could support shipping activity.

"I don't think this steep fall is new in LPG business, but I guess no one thought it would drop this low," the shipping source said.

"We expect the market to come back up when China is back from holiday. We also hoping for US stocks to be back up shortly which will help the shipping market as well."