Shippers of containerized goods were caught off guard this year. Never before had container spot rates risen so far, so fast. But shippers of liquid and dry bulk commodities know such cost swings all too well.
When bulk commodity transport demand exceeds supply, shipping spot rates can keep rising until cargo shippers’ profit margins are erased. The spectacular rise and fall of liquefied natural gas shipping rates is the latest example.
LNG carriers boast the highest day rates of any cargo vessel type. Shippers can afford to pay eye-wateringly high freight because the profit on moving a cargo can be enormous: In mid-November, a cargo could be bought for $20 million in the U.S. and sold for $120 million in Asia.
The wild ride for spot rates began early this year as cold temperatures pushed up commodity pricing in Asia. An LNG carrier was chartered for $350,000 per day in January, a new all-time high for any cargo vessel.
Then rates crashed. U.S. Gulf-Japan rates were down to just $16,800 in mid-March.
Rates rebounded to a new record high last month. The Baltic Exchange assessment for the Australia-Japan route for a tri-fuel, diesel-engine (TFDE) LNG carrier peaked at $366,700 per day in late November. Lloyd’s List reported that one vessel was chartered for $424,000 per day.
Then pricing collapsed. As of Tuesday, the Baltic’s Australia-Japan TFDE assessment was all the way down to $107,100 per day. Clarksons Platou Securities put the global average for TFDE LNG ships at $114,800 per day, down from a high of $205,000 in late November.
“There could be a spike should weather get cold, but very likely the peak in shipping rates for the next few years already happened,” said Stifel analyst Ben Nolan.
Extremely high spot rates generally coincide with higher LNG pricing in Asia than in Europe. That incentivizes transport of more U.S. cargoes to Asia as opposed to Europe, and more European reexports of LNG to Asia. More long-haul voyages soak up vessel capacity, boosting rates.
Commodity pricing is now in a reverse — and highly unusual — situation: LNG cargoes are fetching more in Europe than in Asia, as Europe heads into the winter with decade-low inventories and restricted Russian pipeline inflows.
Nolan said on Tuesday, “With the European price of gas surging past the Asian price, more cargoes are staying or being routed to the Atlantic. The result of shorter average distances with more U.S., Middle Eastern and African cargoes going to Europe instead of Asia is not good news for shipping.”
A premium in Europe over Asia “is quite rare,” said Clarksons Platou Securities analyst Frode Mørkedal.
LNG prices in Asia averaged $5 per metric million British thermal unit (MMBtu) higher than in Europe in October and November, which “instigated a significant amount of reexport trading opportunities from West to East” that “catapulted spot rates,” explained Mørkedal. In contrast, the European gas price was $6 per MMBtu above Asia’s on Monday, “the widest [spread] we have observed on record” and one that has “reduced West-East trading,” he said.
LNG shipping still ‘very healthy’
LNG shipping remains profitable despite the collapse in spot rates. “Even at these lower rates, companies are printing money,” noted Nolan.
Also, spot business is less important to LNG shipowners than to owners or operators in any other ocean segment. Spot rates make the headlines, but the overwhelming majority of LNG shipping revenues derive from time charters.
Chartering activity “has been plentiful of late with several newbuilding deals concluded for delivery in 2024-25 with charters in the seven- to 10-year time frame,” Mørkedal said last week.
Regarding on-the-water LNG carriers, “term charters continue to be discussed in the one- to three-year time frame,” he said. One-year TFDE charters are going for $90,000 per day and MEGI-propulsion carriers for $115,000 per day.
“The LNG shipping market remains very healthy even with spot rates easing from their extreme highs as time-charter activity remains robust,” the Clarksons analyst affirmed.
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NOVEMBER 7-9, 2023 • CHATTANOOGA, TN • IN-PERSON EVENT
The second annual F3: Future of Freight Festival will be held in Chattanooga, “The Scenic City,” this November. F3 combines innovation and entertainment — featuring live demos, industry experts discussing freight market trends for 2024, afternoon networking events, and Grammy Award-winning musicians performing in the evenings amidst the cool Appalachian fall weather.