BW LPG Registers 10% Growth in VLGC Fleet
Less domestic petrochemical consumption of LPG would be positive for VLGC shipping as it would result in a greater surplus of LPG available for export.
However, it is still unclear whether this dedicated-feedstock ethylene (five new ethylene plants, two expansions) and propylene production capacity expansion will displace a portion of the olefin production currently coming from flexible-feedstock ethylene crackers (positive for VLGC freight), or whether it will supplement it and the excess olefin production will then be exported (negative for VLGC freight).
This development, along with energy prices, will be the key driver of LPG balances in the US going forward.
The VLGC fleet grew by 10% in the first quarter of 2016 as 19 vessels were delivered in the quarter. Only two VLGCs have been ordered year to date, and BW LPG expects new ordering to remain subdued in 2016 due to lower freight rates and tighter credit availability.
Outlook A sustainable oil price recovery will pave the clearest path to a rebound in VLGC rates to median levels. Energy prices must reach a level that will allow US producers to bring hydrocarbons back online without immediately capping prices, which can only happen when global oil demand and supply shifts from surplus to balance.
The correspondent increase in LPG production should then start to re-exert downward pressure on domestic US LPG prices, while naphtha, Far Eastern LPG and olefin prices should trade up alongside oil.
Geographic LPG price spreads, the price setting mechanism for VLGC freight in the short term, can then expand and remain sustainably open to support the flow of trade for long enough periods of time to absorb excess shipping capacity and tighten the VLGC market. Concurrently, BW LPG expects continued strong retail demand growth for cooking and heating applications in developing markets.
