Danish Ship Finance issued its latest Shipping Market Review report which focuses, among other things, on the LNG market and its outlook for 2023.
According to the report, surplus vessel capacity is likely to result in short-term freight rate volatility and reduced economic lifetimes. In 2024, the market is likely to remain turbulent until the scrapping of older vessels brings supply and demand back into balance.
A massive inflow of vessels is scheduled for 2023. This is expected to result in a period of surplus vessel capacity, with declining freight rates and secondhand prices, as well as increased volatility and reduced economic lifetimes of older vessels.
The orderbook currently represents 20% of the fleet and is heavily front-loaded. The fleet is scheduled to expand by 5.3 million cbm (13%) in 2023 and 2 million cbm (4%) in 2024 before scrapping. VLGC orders dominate the outlook with an orderbook-to-fleet ratio of 24%. The VLGC fleet is scheduled to expand by 14% in 2023, 4% in 2024 and 5% in 2025 (before scrapping).
Strong demand growth means the market will not balance in the short term
Distance-adjusted seaborne LPG demand is expected to increase by 5% in 2023 and 3.5% in 2024. The Chinese petrochemical sector remains the primary demand driver, with new PDH capacity opening in 2023 and 2024 and robust economic growth predicted to generate a 10% increase in imported volumes in 2023 and 8% in 2024. Most of the volume growth is expected to derive from long-haul imports from the US. Strong shale gas production, low domestic consumption and high domestic inventories continue to support arbitrage trading between the US and Asia (mainly China).
Surplus vessel capacity is building
The LPG fleet is set to expand ahead of demand in 2023. Freight rates and secondhand prices are expected to decline as a result. Volatility will likely intensify until surplus vessel capacity is absorbed by new demand or capacity is demolished. VLGCs seem most exposed, and may try to cascade onto MGC routes where possible.
Environmental regulation may reduce the active fleet by 1.5-2%
The commercial implications of the new environmental regulations (EEXI and CII) are likely to force some older vessels to reduce speeds. This is likely to lower the effective supply by 1.5-2% during 2023 and 2024. This is clearly not enough to balance the market, but it does alleviate some of the pressure to demolish older vessels prematurely.
Older vessels are becoming scrapping candidates
Older vessels are likely to become scrapping candidates earlier than expected. Economic lifetimes for older vessels will shorten, which is likely to lower the value of the remaining older vessels in the fleet. Some may seek refuge as lay-up candidates in anticipation of a better balance between supply and demand.
