Drewry: VLGC Rates Under Pressure amid US Cargo Cancellations

Image Courtesy: Dorian LPG

A wave of cargo cancellations from the US is putting additional pressure on Very Large Gas Carrier (VLGC) rates, which were previously lowered amid excessive fleet growth and weak arbitrate opportunities caused by low LPG prices, according to shipping consultancy Drewry.

Three cargoes from US export terminals were cancelled in June, seven in July and 12 in August so far.

While Asian demand has remained resilient, it has not been sufficiently strong to fully absorb the plentiful supply from both the US and Middle East, Drewry said.

As a result of these cancellations, vessels that were supposed to carry US origin cargo are now seeking employment in the spot market, thereby putting further pressure on rates. The Baltic Index AG-Japan benchmark fell below the crucial level of USD 20 per tonne last week and shipowners’ earnings have now fallen below the operating cost.

“Although cancelations are expected to reduce from the fourth quarter as countries increase their stock-building programme to meet the winter heating demand, this will not be enough to enable shipping rates to recover as vessel supply will remain high. An additional 26 VLGCs will be joining the fleet by the end of 2016 which will keep rates under pressure,” said Shresth Sarma, senior analyst, gas shipping at Drewry.

The VLGC fleet has expanded at the rate of 7%, quarter-on-quarter over the last four quarters, fast outpacing cargo demand growth. Meanwhile, the price differential between LPG in the US and Asia has averaged a mere USD 60 per tonne in the third quarter of 2016, down from USD 208 per tonne over the same period last year. The narrowing gap has squeezed the margin in arbitrage trading, thus affecting employment of VLGCs in this trade, Drewry said.

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