Lack of investments in LNG carrier to hurt market development

The rise of major emerging liquefied natural gas (LNG), buyers led by China has created the need for infrastructure investment and new shipping capacity to avoid price volatility. Continued lack of timely investments in building the LNG carrier fleet would hurt market development and security of supply much more than insufficient liquefaction capacity according to Keisuke Sadamori, Director, Office for Energy Markets and Security at the International Energy Agency.

The LNG carrier spot rates have hit record levels. The Pacific and Atlantic shipping rates have touched $170,000/day and $140,000/day respectively, and Atlantic and Pacific ballast rates remain steady at 125 percent and 150 percent respectively, according to S&P Global Platts data.

The IEA’s projections show that spare fleet capacity in the LNG market was sustained well above 15 percent between 2015 and 2018, but starts to decline sharply from 2019 onwards into single digits, and drops below zero by 2022-2023, indicating severe vessel shortages.

“Changes in the LNG market challenge the traditional LNG shipping business model,” Sadamori said adding that the current liquefaction projects led to many new vessel deliveries, which reach a peak in 2018, but this may not be sufficient for new supply by 2020.

Shipping investment has been under pressure as the banking sector has pulled bank due to sharp losses and write-downs incurred in the last decade as shipping companies reeled from heavy losses and oversupply. Rising interest rates and tighter money supply have raised concerns about new investment in LNG shipping.

“Under the move towards a more volatile and flexible business environment, the shipping industry must find new ways of mitigating credit risks to incentivize shipping investment,” Sadamori said.

Sadamori said that he expects increased flexibility of the LNG market to absorb the negative impact from the difficult trade situation of the impact of increasing trade tensions between China and the US and the tariffs on US LNG.

LNG term contracts signed in 2017 show strong growth in short-term contracts of up to one year, with new buyers showing a preference for time flexibility over destination flexibility, according to the IEA. In general, the share of destination-free volumes is a growing trend, indicating the rapid development of the secondary LNG market.

FRANK UZUEGBUNAM