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LNG shipping rates just hit $125,000 per day

Rates for LNG transport have jumped, buy joy could be short-lived

An LNG carrier owned by Flex LNG (Photo: Flex LNG)

Tankers carrying crude oil and refined products are wallowing below cash-breakeven. Their near-term prospects are grim. In contrast, spot rates for tankers carrying liquefied natural gas (LNG) are now highly profitable, with some vessels earning $125,000 per day.

“The gains have become more significant over the past couple of weeks, and current rates are a stark improvement from [rates] seen this past summer,” said Clarksons Platou Securities on Monday.

Fearnleys Securities described last week’s chartering activity as “frantic.” As Cleaves Securities Head of Research Joakim Hannisdahl put it: “Another week, another rally for LNG owners.”

While six-figure rates look impressive, they’re typical for this time of year. The good news is that LNG shipping — unlike crude and product tankers — is actually experiencing a normal seasonal upswing despite COVID.


The bad news is that LNG shipping is still not back to where it was in 2019 — and there are major concerns about rates in 2021 and beyond.

Rates have rebounded

According to Clarksons Platou Securities, spot rates for tri-fuel, diesel-electric (TFDE) propulsion LNG carriers are now averaging $112,500 per day, up 105% month-on-month. Rates for M-type, electronically controlled, gas-injection (MEGI) propulsion carriers are at $125,000 per day, up 89% month-on-month.

This is up sharply from mid-June lows of $30,000 per day for TFDE carriers and $39,000 per day for MEGI carriers.

But current rates need to be put in context. At this time in 2019, rates for TFDE and MEGI carriers were $140,000 and $150,000 per day, respectively. At this time in 2018, spot MEGI carriers were earning $170,000 per day, with a few vessels being booked at all-time highs of $200,000 per day.


LNG trading normalizes

Following COVID lockdowns earlier this year, the spread between LNG commodity pricing in the U.S., Europe and Asia narrowed. When that spread is too low, the arbitrage profit doesn’t cover the charter cost, so shippers cancel cargoes. That dampens vessel demand and rates, and decreases the volume at sea. One reported side effect was a plunge in transits of Asia-bound U.S. cargoes via the Panama Canal.

Currently, said Evercore ISI analyst Sean Morgan, “rates for the larger vessels have jumped … as the arb [arbitrage spread], especially to Asia, has opened up. Cancellations have largely ceased and charterers are attempting to lock in tonnage amid seasonal demand shifts.”

The more LNG that goes from the U.S. to Asia as opposed to Europe, the longer the voyages and the higher the vessel demand. That’s what’s happening, which is good for spot rates and good for Panama Canal volumes.

“The arb has shifted from the U.S. Gulf/Europe — Henry Hub/Dutch TTF [hub pricing spreads] — to U.S. Gulf/Northeast Asia — Henry Hub/Japan and Korea JKM — during the last few weeks,” explained Morgan. This is “pushing up ton-mile demand on long-haul ships to Asia,” he said. “Delays at the Panama Canal are also extending voyages and helping to bolster global fleet utilization.”

LNG chart
(Chart: Evercore ISI. Data sources: Bloomberg, Evercore ISI)

Hoping for a cold winter

The colder the winter, the better for LNG shipping rates.

During a webcast last week, Hannisdahl commented, “It’s basically confirmed that we are in a La Niña weather pattern this year. That is positive for colder weather for the northeast Asia region — Japan, Korea and northern China. That is likely to drive demand, especially for heating.

“Back in the middle of the year we saw 45 cargo cancellations each month,” Hannisdahl said. “Cancellations are down to zero for December and LNG carrier spot rates are surging. The short-term outlook is really kicking into life.”

Seasonal rebound and stock pricing

LNG shipping stocks have performed poorly this year, as have almost all shipping stocks. Could the winter rate boost give these equities some support?


The complication is that different owners have different exposure to spot rates. Unlike crude and products tanker markets, shippers transport most LNG via multiyear contracts. Only a relatively small portion of voyages are spot.

According to Hannisdahl, “Flex LNG [NYSE: FLNG] is the main investible share in our opinion. It’s highly undervalued, has a modern fleet and has good exposure toward the current spot rate environment.”

Morgan cited improved market conditions and raised his Q3 2020 earnings estimate for GasLog Ltd (NYSE: GLOG) from a loss of 4 cents per share to a gain of 2 cents per share.

LNG chart

But the problem for LNG shipping equities is that investors may focus more on what’s around the corner than on current rates.

Spot rate rally may not have legs

Charterers do not appear convinced that the current spot rate rally has legs.

In a research note Monday, Clarksons Platou Securities analysts Frode Mørkedal and Omar Nokta wrote that “a key difference this year” involves the relationship between spot rates and three- to six-month time charters.

“Time-charter rates in the three- to six-month range are down marginally week-over-week at $68,000 per day for MEGIs, $53,000 per day for TFDEs and $38,000 per day for steam ships. A year ago, these charter rates were at $120,000, $90,000 and $70,000 per day, respectively, nearly in line with prevailing spot rates at the time. Charterers are clearly viewing this improvement as short-term in nature, driven by winter demand and wide LNG price arbitrages.”

Jason Feer, global head of business intelligence at Poten & Partners, said in a webinar last week, “Once the winter spike is over, we would expect to see spot rates come down and availability of vessels to rise.”

Orderbook is high

Feer said, “Our view is that the market is still going to be long [LNG cargo supply over demand] next spring and summer. As prices fall back out of the money, it’s fairly likely you’ll see some cargo cancellations out of the U.S. again. Not to the same degree we saw this year. But there will still be a significant surplus [of LNG supply] in spring and summer 2021.”

An LNG carrier owned by GasLog Ltd. (Photo: Unsplash/Andrey Sharpilo)

Yet another problem is the high newbuilding backlog for LNG carriers, which will add more vessel supply and create headwinds for rates. Orderbooks are historically low for crude and product tankers, bulkers and container ships. Not so for LNG.

“The current orderbook for LNG vessels is equivalent to 23% of the existing fleet,” said Morgan, who cautioned: “2021 probably will not be the panacea to the problems of 2020.”

Hannisdahl sees gross deliveries equating to 9% fleet growth next year (excluding scrapping, cancellations and delivery slippage). “We expect gross deliveries to be persistently elevated going forward,” he said.

COVID fallout: FIDs halted

Fleet growth should be roughly the same as it has been over the past six years. “But over the past six years you have had quite good demand growth,” said Hannisdahl. “The question is: Will we see the same good demand growth [in the coming years]? The answer to that is no.”

In the wake of COVID, final investment decisions (FIDs) for new LNG export projects have ground to a halt. “People are constructing what they were already constructing, but all the new investment decisions are being postponed. That’s the key issue here,” said Hannisdahl. Fewer FIDs equals less incremental volume at sea in the years ahead.

Seasonal strength notwithstanding, Hannisdahl doesn’t foresee another cyclical upcycle for LNG shipping until 2024-25. If he’s right, that’s too long of a wait for most equity investors. Click for more FreightWaves/American Shipper articles by Greg Miller 

MORE ON LNG SHIPPING: Shipping titan Peter Livanos lays out his vision of LNG’s future: see story here. John Fredriksen-backed Flex LNG makes Spotify-style NYSE debut: see story here. The rise and fall of the Cool Pool and what it means to LNG shipping: see story here. 

Greg Miller

Greg Miller covers maritime for FreightWaves and American Shipper. After graduating Cornell University, he fled upstate New York's harsh winters for the island of St. Thomas, where he rose to editor-in-chief of the Virgin Islands Business Journal. In the aftermath of Hurricane Marilyn, he moved to New York City, where he served as senior editor of Cruise Industry News. He then spent 15 years at the shipping magazine Fairplay in various senior roles, including managing editor. He currently resides in Manhattan with his wife and two Shih Tzus.