REPORT BY MARITIME STRATEGIES INTERNATIONAL LIMITED (MSI), LONDON

Gas transportation

2005 has been an exceptional year for the semi-refrigerated gas carrier sector. Earnings and asset values have approached record levels and profitability is rife across the industry.

The strength of the world economy and the industrial sector has been a key driver. China continued to astound, but there was a recovery in Japanese industrial output to join steady growth in Korea, Taiwan, the US and parts of Europe.



Chemical gas shipping booms when the chemical industry booms and recent years have been no exception. MSI’s analysis of puts growth in total chemical gas trade at 20% during 2001-2004 – with ethylene putting in a healthy 17%.

Rising feedstock costs have offset high chemical prices to leave some chemical manufacturers wondering where the profits went. No such worries afflicted gas carrier owners, however. Bunker prices have been high, and some other operating cost elements have been under upwards pressure, but net earnings soared.

Market indicators make reassuring reading. TC rates for an 8,000cbm ethylene ship reached US$600,000/month late in 2005.

Spot earnings have been higher than that on occasion, but averaged US$550,000/month over the course of the year, up 50% on the last market peak in 2000. One slight negative is that high rates have come at the price of greater idle time, as owners traded operating days for higher per voyage cash flow. Idle time has been as high as 10%, but with rates at their highest levels in 10 years, this has been a price worth paying.




Scramble for tonnage
The response to the positive returns has been a frenzied enthusiasm for all things liquefied gas. Activity in the sale and purchase market has been running at double the normal level and the semi-refrigerated and ethylene segments have not been left out.

Particularly headline-grabbing was the exit of Montanari from the gas market in October. The company sold 10 ships between 4,000 and 9,000cbm, including eight ethylene carriers, to a 50/50 joint-venture between Mota Caompagnia di Navigaiona and Cafiero Mattioli. Brokers put the price at US$223 million, of which some US$80 million were attributed to two 2003-built, 9,000cbm ethylene ships.



A further thirteen semi-refrigerated or ethylene ships changed hands in 2005, giving a total volume of 23 ships – more than 10% of the fleet and twice as many as in 2004. Also notable was the sale of two 10,500Cbm, ethylene-capable sister ships, Northern Snow and Northern Ice. At nine and ten years old, the ships fetched an en bloc total of US$61.25 million.

The latter sales and the Montanari vessels highlight the scarcity premium attached to ships already on the water, compared with newbuilding contracts for delivery in 2007 or beyond.

Prices of nearly US$40 million for two year old ships, and US$30m million for ten-year-olds, compare with recent newbuilding contract prices at Korean yards in the low US$30 million and an order in China for similar size ships at US$25 million.

Optimism all the way up the chain
The optimism underpinning the superheated sale and purchase market extends all the way up the LPG carrier chain, from the pressurised vessels at the small end, to the VLGCs. Driving the excitement is one common factor: the Middle East.

For the largest ships, the impetus is substantial new LPG production capacity as a by-product of natural gas developments. This promises to free a perennially supply-constrained industry from the shackles of the fusty old crude oil and refining sectors (where growth is usually in the order of 2-3%) to join the jet set of the international energy market – LNG – where expansion of 10% is not only planned but achieved.



The upshot is realistic expectation of an extra 20 million tonnes of LPG trade by the end of the decade (+40% on 2004). This will mainly benefit the larger vessels but some of the expansion will be outside the Middle East and have knock on effects for smaller vessels.

The positive outlook for chemical gases – ethylene in particular – is also tied to the Middle East but the implications are less clear cut. Middle East ethylene capacity will rise by staggering amounts in the next five years, though maybe not by as much as has been thought as various chemical companies in the region reassess their plans in the context of their neighbours’ ambitions. There is also the problem of so many projects competing for the materials and expertise to build complex petrochemical plants.
Moreover, Asia (and China in particular) is not going to be left out, so the Middle East producers will not have it all their own way.

More than 30 million tonnes of ethylene expansion is likely worldwide by 2010, and the Middle East will account for just over half of this.

So new capacity there will be and much of it will be in the Middle East. Which brings us to the second complication: Where possible the region’s chemical players want to turn the output into liquid or solid ethylene derivates. Typically less than 10% of ethylene makes it beyond the local industrial complex to journey by sea. So the primary beneficiaries of the ethylene boom will not be gas shippers.

The positive side of ethylene production (for traders) is that it isn’t always easy to keep plants running smoothly. Outages are common, some planned, many not. Imbalances build up and seaborne shipments are the result. Hard to predict where the gas will come from and where it will go, but if you add 40 million tonnes capacity to the Middle East, where low feedstock costs mean cheap ethylene, it seems fair to assume there will more ethylene traded, over longer distances. That is good news for shipowners.

There is also good news in the growing emergence of propylene. The flexibility and durability of propylene-based polymers is fuelling the development of new propylene-only production technologies, which should stimulate trade.

Plenty of demand, but not too many new ships needed. Consequently, there is little to worry about on the demand side – in addition to the increases in chemical production capacity noted above, MSI’s macroeconomic outlook is generally positive, with no real problems likely in the next two-to-three years. Chemical gas trade should expand by a further 20% to 2010.



But the shipping industry often conjures a crisis from the supply-side. A year ago we thought the rising orderbook put good odds on a weaker market in 2007. Those odds have now shortened, considerably so for 2008.

The importance of stable supply in the current freight market strength should not be underestimated. Just one semi-refrigerated ship was delivered in each of 2004 and 2005, totalling 16,000 cbm, while close to 60,000 cbm were scrapped. In contrast, the orderbook has sailed past the 300,000 cbm mark in 2005, approaching 20% of the existing fleet.

Much of the orderbook is for the purposes of fleet renewal, some were ordered at prices which give a lot of leeway for profitable trading. But in aggregate they are a substantial threat, particularly if another good year for earnings in 2006 tempts further orders.

As things stand, the delivery schedule offers a rising threat to market balances. 2006 will see modest pressure, while in 2007 things get going and by 2008 the delivery parties will keep brokers away from their desks for weeks.

Scrapping will re-emerge – but only if rates fall – and this will seriously mitigate the flood of deliveries, but it is hard to see any outcome other than a declining market.