LNG: Shipping Outperformer, But Storm Clouds Gathering

The global maritime sector faces a tough operating environment, with many shipping markets battling overcapacity and weak demand outlooks. The LNG sector, however, has emerged as an outperformer, with demand ticking up as countries expand their gas power operations in order to cut costs, diversify and opt for a safer alternative to nuclear. Vessel supply has not been able to keep pace, pushing charter rates ever higher, as the supply and demand equilibrium widens. This has led to expansion plans, with new-build orders increasing, as operators plan to expand their exposure to one of the shipping industry's few growth markets. While BMI remains bullish to this shipping sector we do highlight risks to outlook, which will require operators to keep a tight watch on capacity, as the shale gas revolution and the emergence of intra-Asia LNG trade routes will adjust the demand for vessels.

Growth Trends

  • LNG is outperforming other maritime sectors

  • Under capacity rather than overcapacity is the issue, which has driven LNG shipping rates up

  • Growing market has attracted investment, with LNG new-builds dominating the global orderbook

  • South Korea, Japanese and Chinese shipbuilders are the main beneficiaries of this trend

  • Chinese yards have the strongest growth potential for LNG orders

Risks To Outlook

  • Development of US shale gas

  • Development of intra-Asia LNG trade, which will decrease tonne-miles

  • Larger ships being built, but intra-Asia LNG trade development suggests smaller ships will be in greater demand

  • Vessels built to operate on the spot market, most at risk. Revival of time charters likely

  • Overcapacity a risk, slow steaming and lay up likely to be strategies used, these tactics have been utilised previously

  • Youthful age of fleet means scrapping is not a solution to decrease capacity

LNG The Maritime Outperformer

LNG has been a key growth area for global shipping, with volumes of LNG shipped expanding by approximately 128.3% over the decade (2002-2012) from 113mn tonnes - about 155.9bn cubic metres (bcm) - in 2002 to an estimated 258mn tonnes (356.0bcm) in 2012. This places LNG in second position in terms of world seaborne trade growth after iron ore over the decade, with iron ore volumes just pipping it to first place with a growth of 130% between 2002 and 2012.

Rapid Growth Sector
LHC: LNG Seaborne Trade (mn Tonnes). RHC: World Seaborne Trade 2002-2012 % Change y-o-y

Global demand for LNG carriers is also set to grow alongside an expected increase in LNG demand , particularly fro m gas-hungry Asia which has limited access to gas imports via pipelines. BMI 's Oil & Gas team projects a 70% increase in net LNG import demand from Asia (less Australia, Papua New Guinea and Brunei) between 2012 and 2022. Latin America is another region with strong LNG growth potential.

Asia - The LNG Guzzlers
Changes In Net LNG Import Demand In Asia* (bcm)

LNG production, particularly from Australia and North America, will also be on the rise. Total export capacity, based on projects currently under construction or for which a final investment decision (FID) has already been made, is likely to increase by 149.6mn tonnes per annum (mpta, or 206.4bn cubic metres) between 2012 and 2022. Assuming utilisation rate of 70% owing to maintenance and other unforeseen outages, this could still make an additional 104.7mtpa (144.5bcm) of new LNG supplies available to the market. Export capacity could further grow if all LNG export projects that have been proposed proceed with development. Growth of the global LNG market will support demand for LNG carriers.

Global LNG Ramp Up
Changes In LNG Export Capacity Between 2012 And 2022 (mtpa)

This growth in demand for LNG ships has led to increased LNG vessel construction over the decade, but demand has continued to outweigh vessel supply, leading to increases in ship charter rates. It is this divergence between demand for LNG cargoes and the relative lack of shipping capacity, which has made LNG shipping an outperforming sector and in a maritime context the most desirable shipping market to be involved in or exposed to.

This strong demand and LNG's outperformer status is illustrated in comparing this sector with other shipping markets. Overcapacity has blighted many sectors of shipping leading the industry to manage this oversupply through idling ships and slowsteaming.

A snapshot of data on anchoring, an indicator of idling, and average speed, an indicator for slow-steaming, highlights the divergence in fortunes between LNG and other shipping sectors. There are currently 47 LNG vessels anchored, the majority of which are most likely to be loading or unloading, as according to data from Lloyds List Intelligence, only three LNG vessels are in lay-up. In terms of speed, LNG vessels are travelling at the quickest rate out of the shipping sector, averaging speeds of 13 knots, with this sector's undersupply of vessels ensuring operators do not need to resort to slow steaming and are in fact having to travel quickly due to the relative undersupply of vessels.

No Overcapacity Problems For LNG
LHC: % of Fleet Anchored. RHC: Average Speed (knots)

LNG is set to remain shipping's major growth sector. LNG contracts over the medium term highlight the growth possibilities, with LNG contracts due to come into force between 2014 and 2020 (excluding the contracts that have already been implemented and will run throughout this period) projected to see the beginning of 177.9mn tonnes per annum of LNG (245.5bcm) shipped (the contracts beginning between 2014 and 2020 will run until 2040).

Offering More Growth
LNG Contracts By Start Year (mn tonnes per annum)

This strong growth and the current relative undersupply of LNG vessels has led to a considerable uptick in new-build orders. While previously LNG vessel orders (due to their cost) were normally initiated to cater for a specific LNG contract, we have witnessed the development of new-build orders for the spot market. Companies with a mixed shipping sector exposure have concentrated their investment in the LNG market, over other vessel segments.

This trend has led to LNG new-builds becoming the outperformers in the shipbuilding sector. A snapshot of current orders highlights that LNG vessel orders dominate the orderbook, with LNG new-builds accounting for the largest per cent of the total at 29.34%.

LNG Leading The New-Build Orders
Orderbook As % of Total

Shipbuilders Benefitting- China The One To Watch

The major beneficiary of demand for LNG vessels has been the shipbuilding sector. The tick up in demand and the relative under supply of ships has enticed more ordering. South Korean, Japanese and Chinese yards have all benefitted with total orderbooks for these three countries increasing from 7mn gross tonnes (GT) in June 2009 to 9.4mn GT in December 2012.

LNG vessel new-builds have also started to hold greater relevance for shipyards, with LNG orders accounting for a greater share of yards total orders. For example, in June 2009 LNG orders at South Korean, Japanese and Chinese yards accounted for 4.7%, 1.7% and 0.25% of the yards' total orderbooks, respectively. By December 2012, the percentage of total LNG orders at South Korean, Japanese and Chinese yards has risen to account for 4.4%, 13.8% and 1.4%, respectively of yards' total orderbooks.

LNG Orders Growing In Dominance
June 2009 & December 2012 LNG Orders % of Shipyard Total Orders

In terms of LNG orders, South Korean yards remain the first choice, followed by Japanese shipbuilders, a trend that highlights the tradition associated with the shipbuilding sector, with vessel operators building a relationship with the yards and returning to order over and over again. A larger volume of South Korean and Japanese yards boast LNG vessel construction facilities, but BMI highlights that China is gaining.

Chinese LNG orders have witnessed the strongest growth, averaging an annual percentage increase of 356% between June 2009 and December 2012, South Korean LNG vessel orders increased by 26% and Japanese LNG orders grew by 13%.

China LNG Vessel Credentials Increasing
LNG Orders June 2009-December 2012 % Change

BMI believes that Chinese LNG ship construction has the strongest growth potential in the medium term. Firstly this sector is developing from a lower base, thereby ensuring stronger growth figures. The key driver is, however, going to be the fact that Chinese imports of LNG will give priority to LNG carriers built in China. With China set to be the world's largest source of LNG import growth by the end of our medium-term forecast period in 2017 operators will be keen to ensure their exposure to this high-demand market, so raising the likelihood of increases in LNG orders at Chinese yards.

China The Biggest LNG Importer
2017f Top 10 LNG Importers (bcm)

We note that although only a relatively small number of Chinese yards can construct LNG vessels, when compared to South Korea and Japan, we do expect the Chinese shipbuilding sector to expand its expertise. Currently China's construction model is built on volume, we expect this to steadily change as a period of mergers and acquisitions looks likely. The shipyards that are the most technologically advanced will survive and their expertise will be pooled, thereby better positioning the sector to cater for demand for more high-tech ship orders.

Bubble Warning As Shale Gas & Intra-Asia LNG Trade Develops

Despite the current strong demand and medium-term growth outlook, the threat of a bubble in this sector exists. BMI highlights two threats, which have the potential to derail the sector. The first is the impact on LNG shipping from the development of shale gas, which opens up the opportunity for markets to meet their domestic needs, thereby decreasing LNG imports. The second is the development of intra-Asia LNG trade routes, which threaten tonne-miles.

The US had been a key demander of LNG shipments. Out of all the LNG contracts, the ExxonMobil contract to import 7.8mn tonnes of gas per annum from Qatar, which began in 2008 and is due to run until 2033 is the largest. The US is planning to still import LNG, with deals signed to begin 2019 and 2020 with Nigeria. The eight contracts, which will run up to 2040, are considerably smaller than those we have previously seen for the US, with the total per annum of these seven contracts standing at 12.95mn tonnes.

Top 10 LNG Contracts To Date
Importer Volume (mn tpa) Buyer Exporter Export Venture Start Yr End Yr
Source: Bloomberg
UNITED STATES 7.8 ExxonMobil QATAR RasGas 2008 2033
FRANCE 7.5 GDF SUEZ ALGERIA Arzew 2014 2019
Unspecified 5.5 BG UNITED STATES Sabine Pass Export 2015 2035
UNITED STATES 5.2 Angola LNG Marketing ANGOLA Angola LNG 2011 2012
CHINA 5 CNC Unspecified BG Portfolio 2015 2035
Argentina 5 Enarsa QATAR Qatargas 2014 2034
CHINA 5 CNC QATAR Qatargas 2013 2038
INDIA 5 Petronet LNG QATAR RasGas 2004 2028
SOUTH KOREA 4.8 KOGAS QATAR RasGas 1999 2024

BMI highlights that with the advent of shale gas, more of the US' demand is being met domestically. There has been a steady decline in LNG imports, a trend BMI projects will continue, with our Oil & Gas team actually predicting the US to become a net LNG exporter in 2016.

US LNG Trade Shifting
US Gas Production, Consumption & LNG Export (bcm)

The development of shorter LNG trade routes places another risk on the sector. The shipment of LNG from the Middle East to the US and Europe has led to the steady increase in tonne miles in this maritime sector. In 2012 an estimated 1trn tonne miles was covered by LNG ships up from the 356bn tonne miles shipped a decade earlier in 2002.

Negative Pressure From Intra-Asia LNG Trade
LNG Tonne-Miles (bn tonne-miles)

The development of LNG fields in Asia, coupled with growth demand for LNG from Japan, as it diversifies its power sector away from nuclear, following the Fukushima disaster and growing demand from South Korea and China is leading to greater regional LNG trade. Out of the 103 contracts due to start between 2014 and 2020, 58.3% of them are intra-Asia LNG trade deals. This uptick in regional trade places pressure on the tonne-mile outlook for LNG shipping. This trend therefore increases the risk of overcapacity on the developing spot market, as vessels will complete their journeys more quickly and so will be more quickly available for hire.

Smaller Contract Sizes On Intra-Asia
2014-2020 LNG Contracts By Trade Lane (Average mn tpa)

Another risk stemming from the development of intra-Asia LNG trade is the size of vessels required on this trade route. While deep-sea trade between the Middle East and the US has led to the development of larger LNG ships, the LNG contracts between Asian states are much smaller and as we see the development of intra-Asia LNG trade increase, we see the average size of LNG contracts decrease.

This trend suggests that smaller vessels will be required and although we note that the global fleet size is currently diverse, with the largest percent of the fleet in the 125,000cbm-149,000cbm model range, over the medium-term, larger vessels are due online.

Small Ships, But Larger Ships On Order
Global LNG Fleet Capacity, 2011

BMI highlights the orderbooks for three of the world's largest LNG vessel operators. Over the medium term (2013-2017), Golar LNG, the world's third largest LNG vessel operator, Maran Gas Maritime and Gas Long LNG, which are ranked sixth and seventh globally respectively are due to welcome a total of 33 vessels to their fleets. These vessels' capacities range between 155,000cbm and 174,000cbm.

LNG Orderbook Snapshot
Company Number of Vessels on Order Size of Vessels (m 3 ) Launch Timeline
Source: BMI
Golar LNG 11 160,000-162,000 August 2013-January 2015
Maran Gas Maritime 16 159,800-174,000 October 2013-November 2016
GasLog LNG 6 155,000-174,000 2013-2016

These new vessels, while not the largest LNG vessel afloat - that position is held by Nakilat and its fleet of Q-Max vessels offering capacities of 260,000cbm - do highlight a trend of LNG vessels getting bigger. This is at odds with the development of intra-Asia LNG trade, where contract volumes are smaller, indicating that smaller ships would see greater utilisation.

Risk To Outlook Will Revive Long Term Time Charters

The main risk to the sector stemming from this is that previously LNG vessels were built to contract specifications, as due to their cost, funding was only available after a contract was in place. The rapid demand of LNG has, however, led to the development of a spot market, which in turn has led to ships being ordered without charter contracts in place.

This development of the spot market is evident in the decrease of the percentage of ships connected to charter contracts over the medium term. In 2018 the number of vessels chartered to new contracts is estimated to drop to 11.1%. The large volume of ships currently under construction will offer companies transport options, but a reliance on this market remains a risk to both shipper and shipping company.

Spot Market Chartering Developing
Chartered Ships/ FOB and TBD % of Total LNG Contracts

For the shipper a move to the shipping spot market can lead to volatile shipping costs, while for the shipping company, a vessel not on time charter is much more exposed to the vagaries of the market and so would be the first to be negatively impacted if demand slips.

With risks to the LNG shipping market now starting to emerge it is understandable that some shipping firms, which originally ordered new-build vessels for the spot, are now looking to find time charters for these ships, thereby mitigating risk. Teekay LNG Partners, for example, originally placed orders for two LNG carriers in December 2012, these vessels were ordered without any time charter contracts, but since then the company has managed to secure both with time-charter employment on their delivery in 2016. The company has now ordered two more ships and has stated that it intends to secure long term charter contracts for these two new-builds as well prior to their launch.

How To Tackle Overcapacity If It Arises

In the worst case scenario that the slew of new-build LNG vessels leads to overcapacity the sector has a number of options to manage the supply of ships. As highlighted currently the LNG sector is the global maritime market outperformer, with relatively few vessels in layup and the sector not implementing slow steaming. Should overcapacity develop we would expect to see the number of ships anchored tick up as the owners' idle vessels, and for shipping speeds to decrease. For example, while the LNG fleet in 2013 is currently averaging 39 vessels at anchor, previously the average anchored fleet has reached 52 vessels (for the year of 2011). LNG vessels average speeds have also been slower in the past highlighting that the LNG shipping sector has had previous experience of managing its capacity.

Lay Up & Slowsteaming Have Been Used Before And Can Be Utilised Again
LHC: LNG Vessels Average Number Anchored. RHC: LNG Vessels Average Speed (knots)

BMI also highlights the potential for LNG vessels to be reassigned, with larger ships especially able to play a role in floating storage should demand slip. This will likely be a key option should the development of intra-Asia LNG trade place downside pressure on the demand for larger LNG ships.

Young Fleet
Age of LNG Global Fleet (DWT)

We doubt that scrapping will be a viable choice for the LNG sector, however, as no matter how bad overcapacity the sector is so young that there are very few scrapping options. According to Lloyds List Intelligence just 2.6mn DWT of the global fleet over 25 years old.

This article is tagged to:
Sector: Freight Transport, Oil & Gas, Shipping
Geography: Global, Global, Global

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