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Rush to build new LNG tankers could backfire

The rush to build new liquefied natural gas (LNG) tankers to cash in on high charter rates could backfire, with the market rebalancing by the time the vessels are delivered

Short-term LNG tanker charter rates have more than tripled over the last 12 months, from around $30,000 a day to $100,000 a day. This sparked a rush to build new vessels, with orders in 2011 so far nearly 10 times higher than in the whole of last year.

And although LNG supply and demand is expected to increase – requiring a larger tanker fleet to serve the market – ordering LNG vessels to take advantage of the spot market is risky.

LNG tankers are more expensive to build than oil tankers, because of the equipment needed to keep the cargo at subzero temperatures, so LNG carriers are usually ordered for specific liquefaction plants to carry the super-cooled gas on a specific route. The high upfront cost means the LNG tanker must be in constant service to recoup the investment cost.

“So far in 2011, 45 new LNG ships have been ordered, compared with just five in 2010, and most of these have been ordered on a speculative basis,” said Andrew Buckland, senior LNG shipping analyst at consultancy Wood Mackenzie. But, he added: “Ships ordered now, which will be delivered around 2014-15, have no guarantee that new supply projects will choose to charter these vessels rather than order their own purpose-built ships.”

Shipbrokers also said newbuilds were being ordered as new players try to enter the growing, globally traded LNG market, further swelling the tanker order book. “Several of the orders are from new players in the industry – it’s the only way in to the LNG market. If you don’t have ships on order, or on the water, you will not be invited to bid for the business,” one LNG shipbroker said.

Willing customers

But despite high order numbers, some LNG tankers have already found willing customers and some would replace ageing vessels. “There’s been quite a bit of speculative ordering, but several tankers have already secured employment. Owners have ordered as they see the market improving and there is a replacement demand, with over 40 ships being more than 25 years old,” the shipbroker added. This means the risk of too many tankers in 2014-15 may be reduced.

In the short term, charter rates for LNG tankers are expected to remain high because of additional gas demand from Japan stemming from its disabled nuclear fleet as well as growing Asian consumption in India and China.

“In the short to medium term, we expect significant growth in Asian demand will be met by increased trade from the Middle East and Atlantic basin, which will further tighten the shipping market,” Wood Mackenzie’s Buckland said.

“The Pacific basin is expected to be tightest in 2014, requiring over 40 million tonnes a year of incremental LNG. But, for now, we forecast shorter-haul intra-Pacific trade to begin displacing long-haul Atlantic to Pacific LNG trade, as new projects come on line.”

Australian supply boost

New Australian production facilities are expected to start-up from 2015 onwards, shortening the journey time to deliver to Asian buyers and, therefore, charter-time periods. So far, Asian import terminals have also been unable to receive large Qatari Q-flex tankers, but facilities will be upgraded over the coming years, increasing the flexibility of the LNG fleet.

“Freight rates are expected to continue rising and could go considerably higher in near-term. But an expected decline in long-haul LNG trade and the possible preference for purpose-built vessels by some new LNG projects, implies that if the recent wave of speculative LNG ship orders were to continue they would risk uncertain employment on delivery,” Buckland said.

LNG charter rates have trebled over the last year in line with the growing traded LNG market and after the Japanese earthquake in March. Traders have also taken advantage of the spread in Atlantic and Pacific LNG prices, putting more upward pressure on the LNG tanker market because of increased interest in chartering.

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