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Analysis: VLGC freight rate hits multiyear high amid logistical issues, open arbitrage


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Houston — Logistical issues, a wide open arbitrage for US LPG to Asia and an evolution in global trade flows have pushed freight for Very Large Gas Carriers to multi-year highs in the Middle East and US Gulf Coast regions.

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USGC cargoes have faced berthing delays since February, while the backlog of VLGCs in the Houston Ship Channel have been further affected by recent water contamination due to a fire, market sources said.

"There is a backlog of ships waiting to load in Houston and other ships arriving are waiting to get in to load their programmed cargoes," a USGC-based shipbroker said.

Delays in the USGC caused a shortage of tonnage across the board, sources said, adding 20-30 vessels were waiting to load cargoes. This amounts to around 10% of the global VLGC fleet of 271 at end 2018, with 25 VLGC newbuild deliveries slated for 2019, Banchero Costa's LPG Shipping Outlook published in late March showed.

"Owners had pushed more tonnage to the US after discharging in the east as prospects and rates were better there at the time. This helped reduce the number of vessels in the Persian Gulf. Then PG came alive with more requirements than expected and with vessels delayed in the US, rates took off," a Singapore-based VLGC shipbroker said.

Shipowners expected more ton-mile demand this year due to the increase in US production and fresh cargoes from Canada and Australia, but market sources said the jump in freight had come earlier than expected.

"A lot of ships are trading on spot this year but owners had expected more US production and more ton-mile demand to improve the market, just not to firm so quickly, so the upswing won't last into Q4," a Singapore-based LPG trader said.

While retrofitting for scrubbers was expected to lead to tighter tonnage, sources said that paled compared with the delays that took out a large number of vessels.

"Owners should be making money now; they are certainly much happier than three weeks ago with the index jumping $10/mt," a Singapore-based LPG trader said.


In addition to an open US-Asia arbitrage, a change in global tradeflow fueled by the US-China trade war and OPEC/Non-OPEC supply cuts have raised the tide for loadings out of the region, increasing demand for VLGCs.

A change in trade currents saw a fresh flow of US LPG to India, and long voyages like this increase the ton-mile demand for vessels.

Six VLGCs were enroute to India carrying US LPG -- the latest being the Globe Atlas enroute to New Mangalore, S&P Global Platts cFlow showed.

With Middle East LPG in demand by China, suppliers to India looked to the US for more competitively priced cargoes.

Saudi oil cuts reduced LPG loadings by three to five cargoes per month, a USGC-based market source said. "Not many owners are sending ships there as they know there will not be any additional spot anytime soon," he added.

Shipowners' hesitation to send vessels to Saudi Arabia also sent tankers to USGC, creating a shortage of available tonnage in PG.

VLGC freight has reached three-year highs for the key Houston-Japan and PG-Japan voyages, which sources said could rise further.

"Freight will stay firm for end April into May, but once all those ships return to the spot market later in May, June and July will see weakening," a Singapore-based LPG trader said.

Platts assessed the VLGC Houston-Japan voyage at $85/mt Tuesday, its highest since February 26, 2016.

The key PG-Japan VLGC freight rate was assessed at $52.50/mt Tuesday, up 28% week on week. It was last higher on February 1, 2016, at $54/mt, Platts data showed.

However, shipowners and traders with their own vessels were cautious.

"Most owners want to wait and see how US liftings go this week -- without fog -- and wait for final May Middle East acceptances," a VLGC broker said.

"With delays, who knows how attractive USGC would be to shipowners... it is cheaper to go to PG but the number of cargoes might be limited for them," a broker said, adding the ballast was shorter from Japan to PG and cheaper given Panama Canal fees. However, more cargoes were available out of USGC and Marcus Hook.

A lack of re-let vessels also contributed to short availability.

"Now traders who could re-let vessels don't want to in PG, because if they fix today and need to charter in tomorrow, they could end up paying a higher rate than they earn chartering out," a VLGC shipbroker said.

-- Sarah Raslan,

-- Wanda Wang,

-- Edited by Norazlina Juma'at,