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  September 7th, 2016 | Written by

Pressure is Mounting on VLGC Rates

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  • The VLGC fleet has expanded at the rate far outpacing cargo demand growth.
  • The price differential between U.S. and Asia LPG sank to $60 per ton from $208.
  • VGGC shipowners' earnings have fallen below operating costs.

A wave of cargo cancellations from the United States is putting additional pressure on the rates of very large gas carriers (VLGC), according to the latest edition of the LPG Forecaster, published by global shipping consultancy Drewry.

Two major factors have lowered VLGC rates in recent times: excessive fleet growth and weak arbitrage opportunities caused by low LPG (liquid petroleum gas) prices.

The VLGC fleet has expanded at the rate of seven percent quarter-on-quarter over the last four quarters, fast outpacing cargo demand growth. Meanwhile, the price differential between LPG in the U.S. and Asia has averaged a mere $60 per ton in the third quarter of 2016, down from $208 per ton over the same period last year. The narrowing gap has squeezed the margin in arbitrage trading, thus affecting employment of VLGCs in this trade.

A third factor has also emerged recently, in the form of high numbers of cargo cancellations from U.S. LPG export terminals. Three cargoes were canceled in June, seven in July, and 12 in August. While Asian demand has remained resilient, it has not been sufficiently strong to fully absorb the plentiful supply from both the U.S. and Middle East. As a result of these cancellations, vessels that were supposed to carry U.S. origin cargo are now seeking employment in the spot market, putting further pressure on rates.

The Baltic Index benchmark fell below the crucial level of $20 per ton recently and shipowners earnings have now fallen below the operating cost.

“Although cancellations are expected to reduce from the fourth quarter as countries increase their stock-building programs to meet the winter heating demand, this will not be enough to enable shipping rates to recover as vessel supply will remain high,” said Shresth Sarma, a senior analyst for gas shipping at Drewry. “An additional 26 VLGCs will be joining the fleet by the end of 2016 which will keep rates under pressure.”