According to an Argus Media report, arbitrage economics between the US and the Asia-Pacific region must remain attractive to support Very large gas carriers (VLGCs) freight rates at the higher levels recorded in the fourth quarter of this year.
The EIA has cut its 2021 forecast for domestic propane consumption to 870,000 b/d, from 920,000 b/d previously. Meanwhile, US production will rise to 5.27mn b/d in 2021, from 5.09mn b/d in 2020. This combination should constrain prices, supporting workable arbitrages to Asia-Pacific.
Rates on the bellwether Ras Tanura-Chiba route climbed to $110/t on 11 December, from mid $60s/t in November, while Houston-Chiba rates hit $160/t on 11 December, from $110/t.
Driving Vessel Demand & Rates
An open US to Asia-Pacific arbitrage drove vessel demand and rates up. With winter demand late to pick up, the premium for delivered Argus Far East Index (AFEI) propane versus USGC fob export assessments stretched to $196/t on 11 December, from around $120/t in mid-November.
Residential demand in Asia-Pacific was resilient through 2020, while there was a significant rebound in petrochemical demand — symptomatic of faster economic recovery in the region. And in the next couple of years, the launch of some 12 petrochemical projects will add almost 10mn t/yr to Chinese consumption.
Support from India
Some support will also come from India. The country is now the region’s second largest importer after China, with demand up by 12pc on the year, according to BW LPG vice president Niels Rigault.
“Notably, India started to import from the US since last year. Voyages are over four times longer than voyages from the Middle East, supporting tonne-mile demand. Since 2011, the number of cargoes imported into India increased from 70 to 270, an annual growth rate of 19pc,” Rigault said. Tonne-mile demand is a key indicator in the shipping industry and represents the volume of cargo multiplied by the laden distance travelled. If an increasing proportion of VLGCs are sailing from the US to India, this will keep more ships employed for longer, tightening availabilities and supporting rates.
In December, Indian state-controlled refiner BPCL issued a tender for a 44,000t cargo and explicitly excluded Mideast Gulf sources for the first time, indicating a growing ambition to source LPG from regions such as the Mediterranean, west Africa, the US, Canada or Australia. The tender was unsuccessful on this occasion, but the trend of Indian buying from further afield looks likely to continue next year.
Demand To Narrow by Spring
The sharp rate increase recorded in the fourth quarter stalled from 11 December and some lifters in the US re-sold cargoes rather than pay higher freight rates, suggesting a ceiling has been reached. But the spread on the forward curve between AFEI and US propane swaps suggests the arbitrage could endure through winter. It is likely to begin to narrow through spring returning to levels comparable with early November, before the spike began.
Other Factors Influencing Rates
But other factors — such as Panama Canal transit delays — which tightened VLGC supply look likely to abate to some extent in 2021. The high volume of container shipping and higher LPG heating demand, which contributed to the Panama Canal congestions, may subside after the winter.
Oil analytics firm Vortexa data shows 12 laden VLGCs positioned on the Panama Canal’s Atlantic side in mid-December — equivalent to over half a million tonnes of LPG. Some shipowners take the longer Cape route to avoid delays, but this adds tonne-miles and stretches ship availability further.
Avance Gas said ships were delayed by 5-10 days either by fog, reduced draft water, or by tugboat crew staffing complications induced by Covid-19. Canal authorities blamed hurricane disruption and more days with seasonal fog. Both Covid-19 and disruptive weather are likely to diminish into spring and summer of 2021.
On the ship supply side, another key factor affecting rates, around 32 new VLGCs are due before the end of 2022. This could put some pressures on freight rates, but 12-15 older vessels could also be scrapped according to Avance Gas. The impact of a larger fleet could also be offset by a heavy dry-docking schedule affecting 23pc of carriers in 2021, according to BW LPG.
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Source: Argus Media
