Panama Canal woes ripple across shipping, LPG markets, may disrupt term talks

The number of Very Large Gas Carriers transiting via the Panama Canal is projected to almost halve by February 2024, driving up the freight as ships take longer routes, which along with higher LPG cargo prices, could disrupt contract renegotiations between the US LPG producers and term lifters, trade and shipping sources said.

Restrictions on transits imposed by the Panama Canal Authority, or PCA, to manage ship movements due to low water levels caused by the worst drought in seven decades are estimated to reduce average VLGC transits from 32 pre-2023, to 24 over Nov. 7-30; 22 over Dec. 1-31, 20 over Jan. 1-31 and 18 from Feb. 1 2023 onwards, according to shipping sources.

More recent concerns among the shipping industry are that total VLGC transits might even fall to zero from January 2024 -- which can be secured only via auctions -- will be reduced to nil.

"It's possible that no VLGCs will be able to go through. No Neo Panamax vessels that is," said a shipping source.

Also, the special auction for Neo Panamax ships will be removed until further notice, shipping sources said, adding that LPG ships get lower priority versus container and LNG ships for booking slots. This prompted talk that the ACP and some East Asian LPG importers could negotiate priority transit for VLGCs.

Amid such concerns, shipping sources said Japan's Eneos Globe paid a record of nearly $3.8 million in a mid-week auction to secure priority passage.

While this may price out many other ships, it also heightened worries over premiums that lifters have to face in renegotiating term LPG contracts for the US cargoes.

"If things don't change at the Canal, I agree with traders that it is tough for them to commit, so term negotiations will likely be pushed back, or put on hold," one trade source said.

"Buyers aren't going to like the premiums (offered) and sellers are probably saying they offered too cheap... it makes planning a real headache, to say the least."

The source added that with much lower precipitation during the last rainy season and unless La Nina brings floods, "things will remain the same where they are," and lifters are not rushing to conclude term contracts "until things settle down, so it will be the spot market for everyone for now."

A North Asian lifter said the Panama Canal restrictions are "causing sellers to re-route via Suez mainly to the East", adding about 14 days to the journey.

The long-haul routes tie up ship availability, pushing up VLGC rates on the Persian Gulf- Japan route to about $146/mt – a 37-day high -- and US-Japan to around $238.7/mt on Nov. 8.

High freight

"Freight is not coming off. Given this Panama issue, it will make freight more supportive for a longer period, due to longer tonne-mile," the North Asian trader said adding that higher shipping costs are making CFR cargoes from the West to Asia "too expensive."

The December FEI/CP propane swap spread was valued at $95/mt Nov. 8 -- compared to as wide as $121/mt Nov. 2-- indicating the premium of CFR North Asia versus FOB Middle East LPG cargoes, S&P Global Commodity Insights data showed.

CFR North Asia propane also rose to a 37-day high at $732/mt on Nov. 8, S&P Global data showed, as Japan braces for the winter heating demand season as early as Nov. 11, with temperatures forecast to fall to the 30-year-average, or below the average, almost nationwide after an extended period of warmer-than-usual weather, according to the Japan Meteorological Agency.

Hinting at a standoff in term talks, another North Asian trader said: "I don't expect the sell and buy sides to settle on the premiums over the term deals soon."

Term lifters were heard to be sanguine about the term renegotiations and in no hurry to conclude them in view of prevailing bearishness in China's propane dehydrogenation sector, which has been struggling with margin losses in recent months and keeping PDH processing rates low, while LPG feedstock inventory in China has been ample.

"The PDH sector is not good," the second North Asian trader said. "We may expect relative weakness to persist through winter months. The domestic demand is not there."