Panama Canal restrictions are already forcing ships to take multi-week detours via the Suez Canal and Cape of Good Hope. One shipping segment is more exposed to those reroutings than some other: specialized tankers that carry liquefied petroleum gas (LPG) from the U.S. to Asia.
America is the world’s largest exporter of LPG, i.e., propane and butane. Because the Neopanamax locks opened in 2016, the overwhelming majority of U.S. LPG exports to Asia have been loaded on very large gas carriers (VLGCs) and sent through the Panama Canal. (VLGCs were too large to slot in the older Panamax locks.)
Canal congestion has arisen periodically through the years, but today’s situation — involving an extreme drought — is different and will cause a long-lasting shift in VLGC flows away from Panama, in accordance with Oystein Kalleklev, CEO of Avance Gas (Oslo: AGAS).
“We normally see congestion kind of yearly within the fourth quarter. Now we’re already seeing it in August,” said Kalleklev during a conference call on Wednesday.
“After all, the rainfall will come back, but with the congestion, [VLGC] traffic will go up in Q4, so we don’t see any improvement near-term. I feel we’ll see a clogged canal for the remainder of Q3 and into Q4 and it can probably taper off sometime next 12 months.”
Congestion at canal to persist
“There may be also the discussion about climate change and whether the canal is more vulnerable in the long run. A variety of individuals are making that argument,” he said.
Meanwhile, the amount of LPG transported from the U.S. to Asia is anticipated to proceed rising according to increased U.S. production, creating much more demand for canal transit slots. U.S. LPG exports in January-August rose 10% 12 months on 12 months.
“This trade is expanding,” said Kalleklev, who noted that “America can be expanding quite a bit on the LNG side.” Liquefied natural gas carriers compete with LPG carriers for Neopanamax transit slots.
![photo of an LPG ship transiting Panama Canal](https://www.freightwaves.com/wp-content/uploads/2023/08/30/flickr_LPG-in-canal2_craig-stanfill-1200x672.jpg)
“It’s not likely any surprise that the canal has been clogging up just about every Q4 for the last couple of years, because after they first expanded the canal, it was done to facilitate greater container ships and all of the trade from China to America. No one was considering at the moment that America would turn into the largest LNG and LPG exporter on the planet. The canal was never scaled to this sort of trade — and on top of that, we now have this very big drought.”
If the Neopanamax locks cannot handle all of the container ships, LNG ships, passenger ships and LPG ships that wish to transit, it’s the LPG ships that get stuck in the back of the queue, said Kallaklev.
“There may be precedence given to cruise ships, container ships and LNG ships which have more beneficial cargo than LPG ships. So, you will likely see fewer VLGCs transiting through Panama going forward than up to now.”
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How canal uncertainty affects LPG ship routing
A U.S.-China VLGC voyage takes 58 days round trip via the Panama Canal, 81 days via the Suez Canal and 88 days across the Cape of Good Hope, in accordance with Avance.
The trade is heavily focused on spot deals. After a VLGC unloads in Asia, the shipowner seeks to lock in the following deal because the vessel returns empty, i.e., “in ballast.” If an employment agreement (a “fixture”) is reached, it can include a “laycan” — a time period when the ship have to be available to choose up the cargo.
The issue for VLGCs heading back to the U.S. is that Panama Canal waiting time is now extremely volatile, making laycans harder to hit, and spot rates are very high, adding urgency to maintaining schedules.
“The Panama Canal is a little bit of a bingo. Sometimes you may go straight through, other times you have got to attend for every week or two,” said Niels Rigault, executive vice chairman at BW LPG (Oslo: BWLPG), during a conference call Tuesday.
“We also see that when the Panama Canal opens up for [transit slot] auctions, the worth some VLGC owners are willing to pay simply to go through the Panama Canal for one leg is as much as $2 million,” added Rigault.
In line with Kalleklev, “Waiting time may be very sporadic. Should you discharge a cargo and fix a ship for the U.S., you don’t know if the waiting time will probably be two days, five days, 10 days or 20 days.
“If it suddenly goes up, which happens quite quite a bit, and you have got fixed your cargo with a two-day laycan and also you don’t make it, you will probably be dropped, and then you definately’ll be ballasting on your personal account and could have to repair the ship again.
“A variety of people would fairly just undergo the Suez, or if fuel prices are low, they could go across the Cape of Good Hope to avoid the Suez Canal fee.
“You may also skip the queue by winning an auction, nevertheless it is immensely costly. Individuals are paying top dollar. We’ve seen the numbers go to $1 million, then $1.5 million, then last week we saw someone pay $2.4 million for an auction fee.” (All the recent bids topping $1 million have been for Pacific-to-Atlantic transits on ballast legs.)
“Whenever you add that to the regular fee of near $400,000, the associated fee of getting your ship through the canal is near $3 million. You’d have saved a whole lot of money just going through the Suez or across the Cape of Good Hope as an alternative.”
Spot rates, stock prices rising
The more VLGCs that detour across the Panama Canal, the upper the demand for VLGCs measured in ton-miles (volume multiplied by distance). Higher ton-mile demand is a positive for spot rates.
The Panama Canal effect is supporting rates on top of already strong transport demand. VLGC spot rates are currently greater than double normal levels for this time of 12 months.
Stocks of VLGC owners have been star performers over the past 12 months. Among the many three listed VLGC owners, shares of Avance have doubled 12 months on 12 months. Shares of BW LPG — which announced Tuesday that it can obtain a U.S. listing to enrich its Oslo listing — are up 83%. Shares of Connecticut-based Dorian LPG (NYSE: LPG) are up 63%.
VLGC spot rates are currently $78,400 per day on a round-trip basis from the Middle East to Asia. Rates are $93,500 per day from the U.S. to Asia “but that’s only the case if you have got an ideal voyage that goes straight through the canal, which for essentially the most part shouldn’t be the case today,” said Kalleklev.
The longer distance of the Suez route significantly increases fuel costs, which brings down the web U.S.-Asia rate via the Suez path to around $80,000 per day, according to the Middle East-Asia route, he noted.
Spot rates are heavily driven by arbitrage: the difference between the worth of LPG where it’s produced, within the U.S., and where it’s sold, in Asia. “As of today, LPG is super-cheap within the U.S., driven by very high inventory levels … while demand is robust in Asia,” said Kalleklev.
The worth of LPG is currently $275 per ton dearer in Asia than within the U.S. The transport cost is $175 per ton. That leaves $100 per ton. The typical VLGC holds 45,000 tons, equating to a profit of $4.5 million on a single voyage.
“It’s immensely profitable to maneuver our cargo from the U.S. to Asia — and meaning you may as well pay higher freight,” said Kalleklev.
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