Low oil prices have not triggered the substitution of LPG as the fuel of industrial use, as feared by some analysts. As a result, LPG shipping demand has remained intact and low bunker prices have supported vessel earnings.
Drewry expects this trend to continue, as 60 percent of global consumption is residential whose demand is largely inelastic to oil price change. The remainder is largely consumed by petrochemical production and Drewry estimates that only 20 percent of the sector’s capacity is capable of switching away from LPG fuel. Historically, LPG consumption has proven remarkably stable in spite of oil price volatility.
Meanwhile, the fall in oil prices has lowered shipping’s fuel costs which have fed through into time charter equivalent (TCE) earnings despite weakening freight rates. For example, Drewry estimates that lower fourth quarter bunker costs contributed an 11 percent boost to LPG TCE earnings for very large gas carriers (VLGCs) on the Arabian Gulf-Japan route compared to the previous quarter. Over this period average freight rates fell 26 percent to $85 per tonne. A similar trend has been witnessed on coastal trades, with North West Europe-East Europe TCE earnings rising 22 percent over the same period despite lower freight rates.
“The implication is that LPG shipping has everything to gain from lower oil prices, despite unfounded fears that this may reduce cargo demand and so damage sector earnings,” said Shresth Sharma, senior analyst, gas shipping, at Drewry. “While we do not anticipate VLGC freight rates reaching the highs of last year given the large number of vessels lined up for delivery, we expect bunker costs to remain low through 2015 which will help support LPG shipping earnings.”
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