BMI notes that the boom times enjoyed by the liquefied natural gas (LNG) shipping sector in 2011 and 2012 appear to be drawing to a close as we enter 2013. Delays to a number of liquefaction projects, combined with a steadily growing fleet, will contribute to a loosening of supply, which will in turn lead to a fall in rates. While the sector is, in contrast to the traditional shipping sectors, still a very profitable one, and will remain so, the massive gains made in the share price of LNG shipping companies such as Golar LNG over the past few years will likely not be seen continuing at such a rate. Nevertheless, over the long term we are confident that demand for LNG shipping will continue to grow.
LNG shipping has enjoyed a bumper two years. The nuclear fallout that followed the Japanese earthquake and tsunami of March 2011 was followed by a turn away from nuclear energy in the Asian country. Already the world's number-one importer of liquefied natural gas, Japan ramped up its LNG imports as it closed down its nuclear power stations. Japan was followed by Germany and other countries curbing their nuclear dependency. As a clean, and relatively cheap when compared to oil, energy source, LNG demand surged, and so did rates. More long-term trends that led to increased demand for LNG vessels include more governments looking for a cleaner, cheaper alternative to crude oil, and the development of offshore gas fields. In waters too deep to lay pipelines in, these wells require LNG carriers to transport the fuel from the floating liquefied natural gas (FLNG) units.
Unlike the container and dry and liquid bulk sectors, LNG shipping operators had not participated in the rush to the yards that has led to massive overcapacity in those sectors. As a result, when demand for LNG shipping rose again in 2011, LNG shipping firms found themselves in an undertonnaged fleet, and rates soared. The effect of these developments on the industry is visible in Golar's time charter earnings (TCE): in Q210 these were US$47,332, making Q112's TCE of US$90,464 a 91% increase. According to DVB Bank, rates hit a record US$150,000 in June 2012 on cargoes from the Atlantic Ocean to Asia, and stood at US$115,000 in December.
|Golar LNG Share Price, US$, NASDAQ|
Going into 2013, and through 2014, however, it appears likely that rates for LNG shipping will fall, and that the easy-money days for operators are over. As with any shipping boom, the good fortune led to a rush on the yards. This was constrained by a number of factors - namely the availability of credit and capacity at shipyards capable of producing these hi-spec vessels - yet nevertheless the fleet is set to see substantial growth in the coming years. From the current 371 ships in the global fleet DVB expect this to rise by 20 ships this year and a further 32 in 2014.
The issue, however, is not simply that the fleet will grow - that has been inevitable since the sector first picked up in 2011. Rather it is that demand is now expected to grow at a slower rate than had been projected previously. A number of big liquefaction projects have been delayed, meaning that fleet growth will outpace demand - DVB forecast growth in global liquefaction capacity at 9.7% over the next two years, compared to a 16% growth in the global fleet.
In light of this we project that the rapid growth in rates will stall in 2013 and 2014. We still believe that the sector will, along with offshore support shipping, remain one of the most profitable shipping sectors, and that companies involved with LNG shipping will continue to see strong profits, only that these will not be quite so strong as they have been over the past two years. The strong performance of the sector has been demonstrated in Golar LNG's share price. From March 10, just prior to the Japanese disaster, to the last close at the time of writing, January 4, Golar rose by 95.2%. The stock currently stands at US$38.00, having already retrenched from its October 2012 high of US$47.57, and we do not expect 2013 and 2014 to see the same rate of growth as 2011 and 2012 did.
While the next two years might not look quite so rosy for the LNG shipping sector, we stress that this is only in contrast to the extraordinary success it has enjoyed over the past 20 months or so. Further, the longer-term outlook remains bright indeed. With Angola, the US, East African countries and Australia likely to begin exporting by the end of the decade, demand for LNG carriers will rise once again. How much rates rise will depend on how many vessels come online in that period.