Fossil fuel shipping is still evolving and showing no signs of peaking. Tariffs for some very large gas tankers (VLGCs) have now exceeded US$100,000 per day. Liquefied natural gas (LNG) tankers crossed six-figure territory months ago. Even the most economical Very Large Crude Carriers (VLCCs) have meanwhile exceeded this threshold.
It’s always a sentiment lift when commodity shipping spot indices go from five digits to six digits, just as in the opposite direction it feels more menacing when the Dow falls 1,000 points than when it falls 900 points.
This uptick in sentiment comes despite the fact that most ships on the water had been loading cargo weeks before – in some cases many weeks before – at a time when rates were in the five figures. Larger moves in spot indices do not show up in commodity shipping earnings reports until the following quarter.
VLGC Rates “Raised Dramatically”
VLGCs transport liquefied petroleum gas (LGP): propane and butane. The highest volume trades are US-Asia and Middle East-Asia, with flows to Europe becoming increasingly important.
On Monday, Clarksons Securities estimated the average spot rate for VLGC travel between the US and Europe at $103,000 per day, up 63% from the previous month. (Ship owners earn in dollars per tonne of cargo; this is then converted into a daily rate by index providers and analysts based on assumptions about fuel costs and other factors.)
Clarksons put the global VLGC average at $93,700 per day, up 65% month-on-month. VLGCs with scrubbers—which can burn less expensive high-sulfur fuel oil—earn a $10,000-per-day premium (because daily rates are calculated excluding fuel costs). This pushes the average global spot rate ratings for scrubber-equipped VLGCs to six numbers.
As with crude oil and product tankers and LNG carriers, the war between Ukraine and Russia is driving up VLGC rates.
During a conference call on Wednesday, John Hadjipateras, CEO of VLGC owner Dorian LPG (NYSE: LPG), stated, “There is some LPG-to-LNG substitution in Europe.” The company also noted in its quarterly release that Russian exports to Europe were “subdued” and replaced by European imports from the US Gulf.
Tim Hansen, Dorian’s chief commercial officer, said on the conference call that “demand in Europe due to the unfortunate war in Ukraine is helping our markets.”
LPG demand in Asia is also strong. Clarkson’s Securities analyst Frode Mørkedal said on Monday: “The VLGC market in the West grew dramatically last week. A healthy level of cargo and a lack of tonnage caused rates to skyrocket. An expansion in US-Asian propane arbitrage and a seasonal increase in LPG demand have supported the surge.”
VLCC rates continue to rise
The Clarksons VLCC index includes standard crude oil tankers, those with more economical ‘eco’ designs and those with scrubbers.
On Monday, Clarksons estimated the average spot rate for an ecodesign VLCC with scrubber to be $101,600 per day, up 66% month-on-month. The global weighted average for all VLCC types was $90,800 per day.
Rate strength for VLCCs and other tanker segments has already come ahead of the EU ban on Russian crude oil imports from December 5th.
According to Mørkedal: “Although it is still unclear what the impact of the actual embargo will be, it will inevitably lead to greater travel distances. The future looks incredibly bright for tanker owners,” he said, adding that VLCC resale prices are increasing “week by week”.
Stifel analyst Ben Nolan commented: “Asset value momentum still appears to be accelerating, tanker rates are likely to rise with sanctions and the order book for new tankers remains extremely thin. So assets… could certainly and likely continue to rise, leaving room for a similar acceleration in… stock prices. So we think there’s still some fire that comes with the smoke.”
LNG shipping rates in uncharted territory
With the rise in LNG commodity prices that began in the run-up to the war and the limited number of spot LNG vessels available, spot LNG prices have risen well above other commodity shipping categories.
Average spot prices for tri-fuel diesel (TFDE) LNG tankers exceeded $100,000 a day for the first time in mid-September. On Monday, Clarksons put TFDE vessel prices at $455,000 per day. That’s a 37% month-on-month increase and marks the highest spot price moving average in history for any commodity shipping category.
However, the LNG shipping market is an extreme example of the discrepancy between spot price indices and shipowners’ revenues. The spot market for LNG ships is extremely thin. The vast majority of LNG carriers have contract rates at much lower – albeit still highly profitable – levels.
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