MAKING WAVES January 2021: Everything we ought to know about LNG this month
Tanker-Spotting 🔭
I always loved the sea as a kid. I would sit for hours on beaches of the western French coast, where the Loire river flows into the Atlantic Ocean looking out to the horizon. I must’ve been 6 years old when I spotted my first tanker, rubbing the salt out of my eyes and squinting to understand what I was looking at.
I know today some of them were carrying crude oil to the Donges refinery in Saint-Nazaire whilst others came to pick cargoes of refined products on the other end. At the time I would only watch in amazement, structures the size of a football field sailing away. No soul could be seen on board hence with the distance, the ships looked animated by their own will, never changing course, certain of their destination.
The ships I remember most distinctly were the Liquid Natural Gas carriers. Not only did they look like props on a rugby pitch, compared to their counterparts more akin to wingers, with their big spherical domes. But they also had the letters L, N and G painted a bright white against their darker hulls.
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This month, LNG has left a mark in people’s minds less for the distinctive look that mesmerised me as a child and more for the unusual market dynamics.
Cartoon of the month: “LNG (Carriers) For Sale” — Courtesy of Sheridan Hart
Monthly News Spotlight: LNG Freight Rates Skyrocket 🚀
Temperatures ended up being a LOT lower than expected this winter, especially in parts of North Asia. Reported temperatures reached -18 degrees in Seoul and records were broken in Mongolia, Japan, China and Hong Kong. With the cold wave, heating demand went up leading to an increased appetite for natural gas. At the same time, Asian economies realised their stocks of natural gas were dangerously low. On the demand side, all the boxes were ticked for an increase in freight rates for natural gas carriers (as consumers in areas such as Asia do not produce enough of what they need at home, buyers need to look further afield from Australia or the Atlantic basin).
“LNG freight rates skyrocketed, reaching an average of close to $200,000 PER DAY for hire in January 2021. That’s like buying a Subway franchise every day for the length of voyage, for a total of 20 or 30 days.”
Now on the supply side — timing was awful for the market, at least for those looking for a ship. For shipowners of LNG carriers, Christmas was coming a lot earlier than planned in 2021! A number of LNG carriers had been booked for December 2020/January 2021 loadings leading to the number of ships available to pick up a cargo, to drop significantly. With demand soaring, supply dwindling, it was really just a perfect storm for LNG freight rates to skyrocket, reaching an average of close to $200,000 PER DAY for hire in January 2021. That’s like buying a Subway franchise every day for the length of voyage, for a total of 20 or 30 days depending on whether you transit by the Panama Canal or not. You end up with a lot of sandwiches!
Flows of LNG from the US Gulf to Asia from Vortexa’s data and freight rates from Braemar ACM (one of the world’s leading shipbrokers)
We can see the way the story unfolded in the chart above: flows of LNG increased from a yearly low in June 2020 to a yearly high in December 2020 with daily average freight rates in line with that increase. Then the glass ceiling of shipping returns, as I like to call it, kicked in, cutting short flows as freight rates reached “unsustainable” levels for most buyers. With flows decreasing as a result, we can expect freight rates to follow the same direction.
Freight Economics 101 📚
To understand the developing LNG situation, you must understand how freight economics work. Below you’ll find a brief introduction, which I hope you will find useful.
When looking at market analysis there are really two key concepts to look at: economics of demand and supply which then go on to determine the price of stuff, in this case freight rates. Freight rates represent the cost (or the revenue for a shipowner) of transporting a cargo from A to B. So what does this mean from a freight market point-of-view?
In the world of freight, in layman terms, demand can be translated to how many cargoes are required to be carried on the water from A to B. Going deeper and applying it to the world of energy that ranges from crude oil exports out of the Middle East, to gasoline exports from Europe or natural gas exports out of the US Gulf.
In a way it makes sense we see the raw commodity (i.e. crude) extract from the ground and shipped to the regions where it will be refined into products such as diesel or jet fuel. From there, we see refined product cargoes exported from refineries to areas of consumption, where planes re-fuel and where fuel is needed to drive one’s car.
This is where the ships come in. It is important to bear in mind shipping is a derived demand. It is not the ships themselves that are in demand but the cargoes they carry on-board.
The number of ships on the water matters, and it matters a lot because that determines the overall supply available. There exists an old saying in the world of shipping, one attributed to the mother of a Greek dynasty scion as he was about to embark on his journey within the world of sea transportation:
“If there are 98 ships and 101 cargoes, boom. If there are 98 cargoes and 101 tankers, bust.”
Unfortunately for the market in the early part of the 21st Century the entrance of new players into the shipbuilding market — wanting to capitalise on the ravenous appetite of developing countries in Asia and especially China — led to the supply of ships on the water almost doubling overnight. A 2008 recession ensured demand tripped up and freight rates entered a long period of weakness from which they have never truly recovered.
Ships come in all shapes and sizes in the energy markets depending on the commodity it was built to carry. The size of a ship is measured in deadweight tonnage, another way of saying how much a ship can load. The largest LNG carrier currently in operation is the MOZAH, built in 2008 with a length equivalent to 4 football fields!
Having really captured headlines as of late, LNG carriers are the focus of this month’s news section below:
Screenshot of the MOZAH tracked within the Vortexa platform
To Summarise 🤓
The recent surge in LNG freight rates is one of the many fascinating examples of freight market economics in action, which we’ll continue to explore on a monthly basis. It’s a privilege to be exposed to an industry which is on the front line of international trade. That’s further enhanced by its colourful cast of characters that share the same passion. It is this industry and these stories I will aim to share with you throughout this monthly newsletter.
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About Arthur Richier
Arthur is the Lead Freight Analyst for Vortexa based in London. Prior to this he was on the freight pricing desk at S&P Global Platts, covering dirty and clean tanker markets.
As part of the conversation around freight markets, and their impact from energy markets to our everyday lives, he has contributed to Bloomberg, TradeWinds, Tanker Shipping & Trade (as part of Riviera Maritime Media), Ship & Bunker, The Business Times (Singapore), The Houston Chronicle and Gulf News among others.
In his spare time he sits on the board of the Shipping Professional Network of London, where he aims to bring together young professionals from all aspects of the shipping industry to network, socialise and learn more about the industry he proudly forms part of.
