Global Markets: WoodMac warns LNG shipowners of over-order risk

This year has seen the number of orders for LNG vessels jump to 33, more than the past two years combined with higher spot/short-term charter rates prompting action from shipowners. 

In addition to the rates, newbuilding prices are remaining low, and the LNG trade is picking up, with Asia absorbing new volumes easier than expected, natural resources consultancy WoodMackenzie notes.

A new wave of FIDs on new supply projects is expected to create even more demand for shipping. But owners need to be careful they don’t over order. There is still a huge number of ships ordered in the 2011-2014 LNG newbuilding boom to be delivered to the fleet and there is a long history of new ships arriving before new supply, WoodMac said.

New projects coming on stream up to 2020, and the expected production rise by over 150 mmtpa is beneficial to LNG shipping as the majority of new volumes is coming from the US Gulf. Due to its position, moving 1 mmtpa of LNG from the US Gulf to Japan requires 1.9 ships compared to 0.7 ships to move the same volume from an Australian project, the consultancy said.

China has so far absorbed the new volumes with its imports rising 50 percent during the course of the current year, following a 46 percent rise in 2017. However, China is moving towards seasonal demand pattern as new import facilities open up in the country’s north and more chilled gas will be needed during the winter months.

WoodMackenzie adds that new final investment decisions will be made between this year and 2021, bringing some 114 mmtpa of new LNG to the market from 2023 onwards.

Most of the pre-FID projects are unlikely to be available to ship before 2025. Between the current wave of new LNG supply and the anticipated pre-FID wave, there will be a period of low LNG supply growth. Ships being ordered now will deliver just in time for the start of the period of low supply growth, WoodMac said.

However, looking at the newbuilding prices, that are considered lower than ever, shipowners are tempted to order sooner, especially as the LNG ship construction prices are expected to follow the shipping industry’s trend of growing costs.

Vessel design and technology advances have seen the typical new order LNG ship become larger and more efficient, making ships ordered even three or four years ago outdated.

Image courtesy of WoodMackenzie

So far this year 36 new vessels have been added to the fleet and three have been scrapped. A further 22 are scheduled for delivery before the end of the year – if these vessels are delivered on time and no further vessels are removed from the fleet, capacity will grow by 13 percent in 2018. The 37 vessels currently scheduled for delivery in 2019 will grow the fleet another 7.6 percent.

“LNG trade is growing strongly but our forecast of an 8.2 percent expansion in 2018 lags behind fleet capacity growth. More long-haul imports from the USA to Asia should see tonne-mile demand grow at a faster rate, leaving a delicate balance between supply and demand for LNG ships. But forecast trade growth of 13.7 percent in 2019 should tip the balance in favour of ship owners,” WoodMac’s analysis shows.

However, looking at the wider picture, the consultancy warns that continuation of the current ordering activity could result in too much shipping capacity too soon, especially with the size of under-used and laid-up older shipping capacity that could be more fully employed.

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