It's been heralded as the "next big thing" in the shipping business. The LNG shipping boom can be easily explained, as the demand for liquified natural gas is skyrocketing and all the projections confirm that the fuel could very easily become as important as oil in the coming years. As a result, ship owners around the world have been investing heavily in this "niche" market, in an attempt to expand their activities in healthier and not oversupplied markets. However, with so many owners having the same thought, LNG could soon turn into a nightmare, as newbuilding orders are rising through the roof.
In a recent report, Intermodal's George Lazaridis said that many are in doubt as to the much heralded potential that the LNG market has and the returns it will inevitably bring to most of its newly joined investors. "The truth is that much of the current optimism with regards to the investment prospects of this sector have been greatly fed by the fast increase in demand created in the market by Japan’s ferocious need to find alternative energy sources to cover the “nuclear gap”. Spot freight rates have risen to their highest historical record of $160,000 per day, while short term period rates have closely followed. All this has enticed a numerable amount of owners to invest in this sector in hope of receiving lucrative rates of return on their investment. However, many in the industry now fear that, as Japan starts to restart some of its nuclear reactors this demand will slowly diminish and many of the upcoming and expensive LNG export projects will not be able to find a market for their high priced LNG, leaving as such, many vessels without cargoes" mentioned Lazaridis.
He added that "the truth is that Japan is by far the biggest player with regards to LNG imports and it is also one of the very few markets which can sustain high LNG import prices due to its inability to cover all of its demand from cheaper and closer sources. As Japan starts to rethink on its previous decision with regards to the closure of the 50 or so nuclear reactors, it will inevitably create a major gap in providing the market with significant long term demand growth. At the same time it will be difficult to see any other market cover this gap, as most of the promising markets such as India and China will likely be only willing to attract supplies as long as the price is competitive compared to other energy commodities, while more developed economies such as the US and Europe have already managed to cover much of their needs through shale gas production" he stated.
Intermodal added in the report that "needless to say that many of the speculative orders placed for newbuildings since 2011 have been decided on the basis of a strong increase in demand from Japan. The total LNG fleet stands at 370 vessels while there are 74 vessels currently on order. The major bulk of this orderbook is set to hit the water in 2013 and 2014 where there are 22 and 34 vessels scheduled for delivery respectively. Most of these orders were placed on speculation either that there would be new requirements for long term charter or the spot market would be able to accommodate the excess capacity created. Although the market has changed significantly in the past couple of years, it remains a fairly small niche market where every single new order adds significant capacity to the current fleet.
The analysis went on by mentioning that "taking this point further and looking at the fact that each of these vessels has a newbuilding cost excess of $ 200m, you can see how significant the risk becomes. In comparison, for the same amount of money, an owner could place an order for 3 MR tankers and 5 Handysize dry bulkers, which all together may not currently amount to the same earnings after OPEX, they do however allow for a high degree of flexibility. Not only would you have diversified your fleet and spread your risk in two different markets, but you will have also spread your risk over several vessels and would not suffer as much if say one vessel was left off hire for one month. It may seem as though the return on these LNG vessels is much more promising than most other shipping segments, but when one accounts the risk involved you can quickly tell that it may be safer not to place all your eggs in one basket" Lazaridis concluded.