Persian Gulf-Japan VLGC rates set for more gains after reaching record above $150/mt

VLGC rates on the key Persian Gulf-Japan route are expected to rise further through Q4, as North Asian LPG demand strengthens during winter, after tight tonnage, longer journeys with rising US-to-Asia flows and busy drydocking schedule propelled freight to the highest on record at $154.5/mt Sept. 13, S&P Global Commodity Insights data showed.

This is stoked by healthy vessel demand, even as newbuild very large gas carriers delivered to-date totaled 26 units, taking the global fleet to 364. Shipping brokerage Fearnleys in early-February projected this year's orderbook at 48 VLGCs.

"Shortage of ships East and West and with positive arbitrage, the market is really moving into record numbers," one shipping source said.

"Although the AG [Arabian Gulf] market seems to have less product on crude cutbacks, the US has really been active with products in past months," he said.

"With most US tons moving East, creating longer voyages and with Panama issues increasing, such as draft and waiting time -- which again creates market uncertainty -- freight will go up."

Shantanu Bhushan, senior consultant with Poten & Partners LPG/NGL Consulting, said 26 VLGCs have been delivered so far this year and another 17 during rest of 2023, according to the latest orderbook delivery schedule.

Bhushan attributed "the dramatic increase" in freight to the improvement in fixtures concluded over the past two weeks that absorbed available tonnage in the Middle East.

According to Poten, three VLGC fixtures were concluded in the week ended Aug. 18 for loading in the Middle East, and another four the subsequent week. For the week ended Sept. 1, VLGC fixtures doubled to eight and for the week ended Sept. 8, eight fixtures were reported, he said.

Many vessel owners opted to reposition tonnage to the West of Suez mainly on a lack of spot cargoes in the Middle East attributable to production cutbacks, and for better employment and earnings.

The East of Suez market held a premium to the West for most of mid-May through mid-July. This flipped in the last decade of August, prompting vessels to be drawn towards the US Gulf, as owners sought to gain from better rates in the West of Suez market, he said.

Even with more operational VLGCs worldwide, rates continued to rise on higher LPG trade, he added.

"Tight Middle East LPG availability led to more US-Asia voyages", he said. "With lower North Sea availability and 'untouchable' Russian LPG volumes, North West Europe has to rely more on the US. However, North West Europe has to compete with Asia to secure US cargoes, thus supporting arb and VLGC freight rate."

Panama Canal poser

Adding to this is uncertainty surrounding Panama Canal transit and more than 30 VLGCs engaged in sanctioned trade.

"Tonnage supply squeeze is also supporting freight markets," Bhushan said, adding market inefficiencies led to restricting vessel supply, with ships due for discharge at Chinese ports disrupted by adverse weather such as typhoons, sparking uncertainty over ship itineraries.

Panama Canal congestion due to drought-related restrictions also contributes to vessel supply constrictions, as owners and charterers consider whether to ballast through Suez or Cape of Good Hope, or face long waiting days at the Panamanian waterway, entailing longer voyage durations.

They could also pay exorbitant fees for an auction slot which were recently reported at $2.4 million, he added.

The first shipping source said about 58 VLGC's were passing Panama Canal southbound in August, which means East discharge, and with mostly two ports discharge, including occasional delays.

"No wonder BLPG1 [Baltic rates] gained more than 61% in just 12 sessions, from $94/mt as of Aug. 23, 2023 to $151.43/mt on Sept. 8. This was the highest level the index achieved since the Baltic Exchange started publishing BLPG1 in Dec 2002. BLPG1 continues to trend above its five-year maximum [2018-2022] for the seventh consecutive month," Bhushan said.

The fixing window has also widened in the past couple of years, he said, adding, "we already saw several October laycans in August. If we compare it with fixing activity in August 2021, basis Poten's compendium of VLGC fixtures, only three October 2021 laycans were seen."

Another ship broker said: "Ship owners just kept pushing up levels, which charterers swallowed up."

The first source said India is increasing imports into winter and draft in Haldia is going down, creating longer turnaround of vessels.

Open US arbitrage

The uptrend in regional LPG prices -- with CFR North Asia propane reaching near seven-month highs at $696.5/mt on Sept. 13 -- attracted Western cargoes East, helping to offset Middle Eastern shortfalls ahead of North Asia winter.

Traders estimated US cargoes loading in September at 3.3 million mt and October- loading at 3.6 million mt.

Bhushan estimated around 2.5 million mt of US LPG were exported for discharge in Asia in August and a total of around 20.3 million mt have been exported from the US for discharge in Asia during the first eight months of 2023, up 19% on the year.

In contrast, when Persian Gulf-Japan VLGC rates last jumped to near six-month highs at $117.5/mt June 26 and Asia propane weakened during summer, the Western arbitrage narrowed further after US LPG loadings in June were limited to 2.4 million mt.

As projected, dry docking schedules are busy this year, with sources estimating some 60 vessels due for drydocking works or underwater surveys.

Bhushan estimated about 30 VLGCs slated for surveys during the rest of 2023.

"Dry docking schedule is also quite busy this year, which will have some impact on freight," the first shipping source said. "But with 26 deliveries so far, the effect should be somewhat lower than previous years. The US seems to be exporting high volumes and the arbitrage has been in favor, hence healthy activity and with more eastern discharge, rates will follow and be strong," he said.

"We are seeing forward- fixing increasing, bringing uncertainty of cargo holders who don't want to be left out with short list of ships."