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Jumping on the VLGC gravy train

The crude tanker market may be struggling this year but 2014 has been a gravy train for VLGCs.

Despite 13 additions to the fleet last year and 12 more delivered or in the process of delivering this year, spot rates in this sector soared mid-year to more than $100,000 a day AG/East. Since then earnings have dropped some 40% but still remain at healthy levels.

Gas carriers carry primarily liquefied petroleum gas, ie propane and butane, petrochemical gases used as feedstock for the chemical industry, and ammonia. According to Italian broker Banchero Costa, the LPG trade has been growing at a healthy 4.1% a year for the last decade, driven latterly by emerging economies like India, Indonesia, Thailand and Brazil. However the trade is notoriously volatile.

The arrival of long-delayed capacity in the Middle East, shale gas-fuelled exports from the US and booming demand from Asia, together with a dearth of deliveries in 2011/2012, contributed to the best conditions in the sector since 2008. The US went from being a net importer of LPG to being a net exporter in five years, and the projections are for massive increases in exports.

Such growth of course has not gone unnoticed by investors. With the lacklustre crude market, substantial money has been poured into gas carriers. This year 39 VLGCs have been ordered according to Banchero Costa in a review of the sector, taking the VLGC orderbook for 2014-2017 to 83 units totalling 6.94m cu m, or 54% of the current trading fleet capacity.

Since the vast majority of the orders are at established Japanese and Korean yards the Italian broker does not anticipate many delays or cancellations. “The delivery of all these vessels in the next two or three years may lead to oversupply and pressure on the market,” it concludes.

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