DNV GL’s Maritime Trend report foresees that US is going to dominate LNG growth in 2019. US, as “a new kid on the bloc”, seems to be introducing new dynamics, such as increased tonne-mile demand, attractive price arbitrage and much more flexible terms of contracts.
As explained, US gas is still establishing its footprint and is testing all potential markets, such as Latin America and Europe, as well as the Far East. One million tonnes of the US gas that is to be sent to the Far East, requires around 1,7 ships, whereas the comparable trade originating in Australia generates a demand for 1.1 ships only. So, the tonne-mile effect generated by US exports is currently more rewarding than anywhere else.
In addition, the pricing of US gas and its competitiveness is a crucial factor. While most of the traditional Asian gas contacts are based upon oil linked prices, in US, gas is priced according to the Henry Hub Gas Index. This means that US gas is not sensitive to changes in the oil industry.
The US contracts also bring great deal of flexibility, when it comes to terms and conditions. Contacts can be signed for any duration and quantity, while there is also a lower penalty for not picking up the cargo, as in the US, only the liquefaction fee is charged.
Further, no fixed delivery locations are required, which is of particular interest for traders: In case of over contacting, traders are able to re-sell their surplus of cargo somewhere else.
The report highlights that all of these developments have changed the LNG trade significantly, making it more international and flexible. On one hand, the growing number of importers generates a steady increase of demand, but, on the other hand, forces suppliers to demonstrate more flexibility.
For shipping, it means more spot trading and more diversified trade partners. In general, more competitive US pricing should have a positive tonne-mile impact, however on the flip side, it also introduces a risk of redirecting some cargoes to shorter routes, i.e. Japanese traders reselling their US purchased gas in Europe.
Concluding, the report notes that it may take a while before LNG carriers experience higher earnings. In light of the fact that major expansions of export terminals are planned for 2018 and 2019, freight rates are also likely to remain low throughout 2017.