LNG is one of the fastest growing shipping sectors which witnesses an ever increasing number of vessel orders.
So far this year, ship owners have ordered 33 new LNG ships, representing a significant increase compared to nineteen newbuilds in 2017 and six a year earlier.
The decision to order new units is prompted by higher spot/short-term charter rates, still-low newbuilding prices and rapidly growing LNG trade, as explained by Andrew Buckland, principal analyst for LNG shipping and trade at Wood Mackenzie.
According to Buckland, new LNG supply is being absorbed far more easily than many expected by booming demand in Asia, with China at the forefront of demand growth.
A new wave of final investment decisions (FIDs) on new supply projects is expected to create even more demand for shipping. Wood Mackenzie currently forecast that 114 mmtpa of new LNG capacity will take FID between 2018 and 2021.
However, owners need to be careful not to over order as there are many vessels from the current orderbook that will soon join the LNG fleet.
The sector reaps the fruits from new LNG supply projects coming on stream in a relatively short period. Wood Mackenzie estimates that LNG production will increase by over 150 mmtpa between 2015 and 2020. In comparison, supply increased by 20 mmtpa in the five-year period prior to 2016.
What is more, newbuilding prices for LNG ships have never been lower, tempting owners to order new ships whilst the prices remain low, according to the consultancy group.
Wood Mackenzie further said that vessel design and technology advances have seen the typical new LNG ship become larger and more efficient, making ships ordered even three or four years ago outdated.
In addition, the introduction of gas-injection slow-speed engines has offered better fuel savings.
So far in 2018, 36 new vessels have joined the LNG fleet and three have been sent to demolition yards. 22 ships are slated for delivery before the end of the year. With this addition, capacity is expected to grow by 13 percent this year.
“LNG trade is growing strongly but our forecast of an 8.2% expansion in 2018 lags behind fleet capacity growth. More long-haul imports from the USA to Asia should see tonne-mile demand grow at a faster rate, leaving a delicate balance between supply and demand for LNG ships. But forecast trade growth of 13.7% in 2019 should tip the balance in favour of ship owners,” according to Wood Mackenzie.
Wood Mackenzie further said that peak demand periods in Asia see more US exports attracted to long-haul destinations, taking ships out of the Atlantic basin. This drives up charter rates globally and even higher in the Atlantic basin. In June, charter rates in the Atlantic basin peaked at around USD 90,000/day, whilst rates in the Pacific Basin at the same time were closer to USD 70,000/day.
In conclusion, the consultancy said that the market clearly wants more of the newbuilds and that orders have been too little too late.
However, when looking at the wider picture, there is a lot of new capacity still to be delivered. Additionally, there are under-used and laid-up older units that could be more fully employed, the consultancy added.
“The next pre-FID wave of LNG supply won’t come on stream until mid next decade. If ordering activity continues at recent levels there is a high danger that it will be too much too soon,” Wood Mackenzie noted.