LNG shipping rates rise as sanctions hit vessel availability

LNG shipping rates have surged to USD 130,000 pd currently from around USD 80,000 pd at the end of September due to tight vessel supply and seasonal firmness in demand, according to shipping consultancy Drewry.

Furthermore, the upward momentum in rates is expected to be maintained in the fourth quarter of 2019 due to a reduction in the availability of vessels in the spot market, driven by several factors including U.S. sanctions on COSCO-linked LNG vessels, a rise in LNG demand, vessels being used for floating storage and typhoons causing delays in China and Japan.

“The LNG shipping market, which had been reeling under a long spell of low charter rates in the first three quarters of 2019, finally came to life when a combination of factors worked in tandem to squeeze the vessel supply,” Drewry explained.

First, the U.S. sanctions on COSCO-linked LNG vessels forced charterers to find replacement vessels from the spot market, reducing the prompt availability of vessels.

Moreover, the ongoing contango in LNG prices has resulted in a sudden jump in floating storage levels in Asia, further reducing the vessel supply in the market. In addition, typhoons in China and Japan have affected vessel offloading in the region. Adding fuel to the fire, high LNG inventories in Europe have caused LNG vessels to either slow steam or delay deliveries, “absorbing more vessels from an already tight fleet.”

On September 25, 2019, the U.S. imposed sanctions on Chinese shipping companies, COSCO Shipping Tanker (Dalian) Co. and COSCO Shipping Tanker (Dalian) Seaman and Ship Management Co., for allegedly transporting Iranian oil on their tankers despite the sanctions on Iran. In the same line, 12 COSCO-linked LNG carriers were also blocked from trading. The resultant reduction in vessels has triggered LNG charter rates over the last two weeks.

Among the 12 vessels, six Arc-7 class LNG carriers (with a combined LNG-carrying capacity of 1 million cbm) under the 50-50 Yamal LNG JV between Teekay LNG and China LNG Shipping (50% owned by COSCO) were blocked. This lead to a setback to the Russian LNG exports which are dependent on the ice-breaking capability of these vessels during winter.

The remaining six LNG carriers linked to COSCO were on charter with China National Offshore Oil and Gas Company (CNOOC), which is now seeking to replace the carriers on an immediate basis, that will further deplete the prompt vessel availability, causing a surge in rates.

As a measure to weather the storm, Novatek’s Yamal LNG project is seeking to use Norway or Murmansk as transhipment hubs to fulfill its contractual obligations. Furthermore, ongoing weather delays caused by typhoon Hagibis in China and Japan have resulted in a Chinese-receiving terminal being shut down and causing offloading delays in Japan and limiting vessel availability.

“The market is facing scarcity of prompt vessels at a time when LNG trading has started to rise ahead of peak winter heating demand. We expect many Asian countries to increase their LNG imports in the fourth quarter of 2019, with expectations for a colder winter this year,” Drewry noted.

Increased demand expectations have also spurred forward LNG prices, leading to a rise in the use of LNG carriers as floating storage. Higher LNG forward prices have also given an incentive for LNG carriers to take longer voyages and diversions to avoid quick deliveries, further contracting vessel supply.

LNG shipping rates have gradually increased on the BLNG1 Index (the Gladstone-Tokyo route) to stand at USD 132,900 pd on October 11 from USD 61,100 pd on September 24 (before the sanctions), up by 117%.

“In the near term, vessel availability is unlikely to increase. Therefore, we project TFDE rates for a 170,000 cbm vessel to breach the USD 200,000 pd mark in the short term, while steam turbine rates will cross the USD 100,000 pd mark.”

High demand and tight vessel availability is expected to keep shipping rates high in the range of USD 150,000 pd – USD 200,000 pd in the fourth quarter of 2019, Drewry concluded.