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LPG carrier market: A brief overview - Views on News from Equitymaster

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LPG carrier market: A brief overview
May 15, 2007

Introduction
Seaborne transportation of LPG involves three principal cargoes (1) liquid petroleum gases, (2) petrochemical gases or petchems, and (3) ammonia. The term LPG generally refers to all of these three principle categories. The aforementioned types of LPG, which are transported by specialized vessels, can be further divided into different gases and petchem feedstock (see chart below)

LPG carriers are commonly referred to as ships which can transport LPG, petrochemical gases and ammonia, however, only a limited number of LPG carriers are fitted to accommodate the transport of ammonia and certain petrochemical gases such as ethylene and VCM, which have characteristics that require additional design features and/or equipment on the vessels. LPG, petrochemical gases and ammonia can be in a gaseous state under normal ambient temperatures. In order to facilitate handling, all the products are liquefied in order to reduce their volume for seaborne transportation. The method of liquefaction determines the type of gas carrier used to transport the product.

  • Fully-pressurized ships carry the cargo only at ambient temperatures in tanks suitable for a maximum pressure of 17 bar (kg/cm2);

  • Semi-refrigerated ships apply a combination of refrigeration and pressure, accommodating temperatures down to minus 48 degree Celsius and pressure of up to 9 bar (kg/cm2). Semi-refrigerated ships with gas plants are able to cool cargoes further down to minus 104 degree Celsius and are referred to as ethylene carriers; and

  • Fully-refrigerated ships carry their cargo only in refrigerated form at temperatures down to minus 48 degree Celsius by cooling the cargo with compressors onboard.

LPG Vessel Segments and Trading Patterns

  • 3,000-7,999 cbm - These are the smallest group of vessels, and are primarily composed of fully pressurized vessels, which carry LPG and petrochemical gases. There are also some semi-refrigerated vessels in the 3,000-5,000 cbm range, including several 4,000 cbm ethylene-capable carriers. The trading patterns of these vessels generally consist of short-haul "cross-trading" routes, which include hauls throughout the Far East, the Mediterranean, Northwestern Europe and the Caribbean. The majority of the existing ethylene carriers are in this size segment.

  • 8,000-21,999 cbm - There are some fully-pressurized vessels in this size segment, however, most of the vessels between 8,000-21,999 cbm are semi- or fully-refrigerated vessels. The majority of vessels under 20,000 cbm are semi-refrigerated while the majority of vessels over 20,000 cbm are fully-refrigerated. The semi-refrigerated vessels carry mainly petrochemical gases and are involved in short cross-trades with some longer hauls, while the fully-refrigerated vessels carry LPG and ammonia, mostly on long-haul routes. These vessels usually trade Transatlantic between the Mediterranean and Northern Europe, and between the Arabian Gulf and Southeast Asia and the Far East.

  • 22,000-49,999 cbm - The vessels between 22,000 and 49,999 cbm are almost exclusively fully-refrigerated vessels which carry LPG and ammonia on both long-haul and cross-trade routes.

  • 50,000-69,999 cbm - Vessels in this size group are all fully-refrigerated and transport LPG and ammonia. Typical trading regions normally include both long-haul trades between the Arabian Gulf and the Mediterranean, and cross-trades in the North Sea and Europe. The usual ammonia trades are typically shorter cross-trades.

  • 70,000+ cbm - All vessels 70,000 cbm and over are fully-refrigerated and carry LPG on long hauls trades worldwide. However, the Middle East Gulf to Japan or Korea is an important trade route and is often used as a reference when describing this market.

Demand for LPG: Transportation of petrochemical gases is a fast growing market, driven primarily by industrial and consumer demand for products derived from petrochemical gases such as plastics/polymers, synthetic-based products, textiles, chemicals and rubber. LPG, on the other hand, is an associated gas, produced as a byproduct of crude oil and natural gas production, and is primarily used as fuel for transportation, residential and commercial heating/cooking, and as a feedstock for the production of petrochemicals. Trade statistics show that general economic growth (or the GDP) is one of the best indicators of change in demand for seaborne transportation of gas. With the flaring of LPG now being prohibited under Kyoto Protocol, LPG is expected to become a supply driven market. Producers of LPG will now have an option of either storing the gas in specialized tanks or shipping it. Considering that storage tanks are expensive to build and maintain, and unlike crude and natural gas there is no pipeline infrastructure, a significant portions of the gas is expected to be distributed through ships.

Freight rates: Freight rates in the LPG segment have been traditionally less volatile as compared to tanker and dry bulk rates with the exception of the VLGC (very large gas carriers 70,000+ cbm). For instance, in the year 2006, time charter equivalents for a VLGC of 82,000 cbm ranged from US$ 400,000/month to US$ 1600,000/month.

The current world LPG capacity is estimated at about 11.7 m cbms. With close to 52% of the existing LPG fleet on order book, fleet addition is expected to grow at a CAGR of 12.8% till 2010 (considering all the ships on order). In comparison, LPG export volumes are expected to grow at a CAGR of over 8.7% during the same period. This might create some pressure on the freight rates. However, if one factors in the deletion, the demand and supply situation appear finely balanced. Assuming that all ships more than 30 years are removed from service (around 18% of the fleet by 2010), the increase in fleet will be 8.9% CAGR, almost equal to the demand growth of 8.7%. Also, significant portion of this addition will be coming in the VLGC segment. Hence, other segments might continue to witness stable freight rates going forward.

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