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22-05-2019

LPG carrier freight market braces for disruption as IMO 2020 nears

Owners and charterers of Very Large Gas Carriers are bracing for disruption to freight rates as vessels are increasingly fixed with scrubbers ahead of the International Maritime Organization’s move to cut bunker fuel sulfur limits to 0.5% from 3.5% from next year.

The transition is poised to split the LPG carrier sector into “flex” and “unflex” segments, between flexible vessels and ships without scrubbers, which will create uncertainty in the freight market if the price of low-sulfur fuel proves costly, shipping and trade sources said.

Opinions were mixed on the impact a two-tier market will have on the freight rate structure and the chartering strategies of shipowners.

Some market participants said VLGCs with scrubbers could command higher rates to those not fitted with gas emission cleaning devices.

Depending on tonnage, shipowners that fitted scrubbers and could sail at full speed may be inclined to keep their vessels in the spot market to take full advantage of the upside, one shipping source said.

Vessels that have missed the move towards scrubbers or chosen not to retrofit are looking to hedge the spreads between high sulfur and low sulfur fuel oil or marine gasoil in the swaps market, shipping sources said.

“One thought could be that there will be two sets of freight; one for scrubbers and one for the non-fitted older tonnage,” the source said. “In general, there is interest to [time] charter out non-scrubber fitted vessels with high consumption [of low-sulfur fuel] over the IMO January 2020 period,” the source added.

One shipowner said there were currently still more vessels without scrubbers than those fitted with the device and felt the freight structure was divided in two, but whether this remained the case would depend on whether scrubber-fitted ships could leverage the wide price difference between LSFO and HSFO.

The Singapore Marine Fuel 0.5% premium to the Mean of Platts Singapore 380 CST HSFO assessment hit a record high on May 14, backed by strong buying, as Singapore’s LSFO sales more than doubled year on year over January-April amid demand growth for cleaner fuels ahead of IMO 2020, S&P Global Platts data showed.

The Singapore Marine Fuel 0.5% premium hit $97.20/mt to the MOPS 380 CST HSFO assessment May 14, surging $25.89/mt day on day, Platts data showed. Marine Fuel 0.5% was assessed at $495.50/mt the same day.

Globally about 20 ships were currently being retrofitted with scrubbers at a cost of about $3.5 million each, shipping sources said.

Another shipping source said around 25 vessels have been fitted with scrubbers and around 40 more were due to be fitted, or will be fitted on newbuilds, likely resulting in some divergence in freight market structure.

Last December, Grieg Shipbrokers said 29 installed sulfur oxide, or SOx, scrubbers had been registered in the current gas carrier fleet and 17 had the option to install scrubbers, while among the 75 gas carriers under construction, 37 will have a scrubber installed and three had the option to install the equipment.

Major shipping firm BW LPG said there were currently 269 VLGCs on water and 38 on order that were slated for delivery over 2019-21.

SCRUBBER-FITTED SHIPS SET TO COMMAND PREMIUM

Despite widespread talk of a divide, some market participants said the spot freight structure would not change to reflect scrubber and non-scrubber-fitted ships.

“Freight rate itself will be the same between scrubber fitted versus non-scrubber vessels; the spot market rate will remain as ‘Baltic’ for now,” another shipowner said.

However, he said owners of scrubber-fitted vessels could potentially earn higher margins on a time charter basis as bunker costs were reduced by the improved efficiency to non-scrubber vessels, which will need to use costlier low sulfur fuel or marine gasoil.

Shipowners generally ask charterers to pay a premium for scrubber-fitted ships for time charters as charterers gain from low-cost bunkers, he added.

If the market rate is $800,000/month, owners will seek a premium for scrubber costs of $100,000-$200,000/month, bringing the actual time charter rate to $900,000-$1 million/month, he said.

“In the case of spot business, owners can cut bunker costs since they operate the vessel on their own. Therefore, it’s OK to get the freight rate as just Baltic, which equals the same freight as non-scrubber vessel,” he added

One regional trader also expected scrubber-fitted ships to command a premium. “It won’t be as easy to find bunker ports supplying gasoil, at least at the onset. Not all bunker ports will be ready for the change, so that would mean ships fitted with scrubbers should have more flexibility,” he said.

Spot VLGC rates on the Persian Gulf-Japan route surged to the highest in more than four years at $65/mt on April 26 before easing to around $53/mt last Friday. Houston-Japan rates hit $100/mt at the same time before dipping to $95/mt last Friday, Platts data showed.

The Baltic LPG rate has averaged $56.095/mt to date in May for the Persian Gulf-Japan route, a year-to-date high, while the Houston-Japan rate has averaged $95.14/mt.

BW LPG in its Q1 report said that in the short term, continued high US LPG exports were expected to support the improvements in rates that began in late March. While it revised down exports from the Middle East down due to US sanctions on Iran and OPEC crude output cuts, it said this would be partially offset by incremental exports from Australia, the US East Coast and Canada.

Source: Platts

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