LNG shipping rates to soften in 2024 but will still be healthy amidst a balanced market
LNG shipping rates in 2024 have been lower this year than the 2022-23 highs but are still healthier than the pre-2019 levels. Rates have remained flat due to subdued European demand, owing to ample inventory (93% full as of September), higher renewable and nuclear output, weak gas demand and futile revival of industrial growth.
Moreover, the influx of modern carriers in 2024 in the growing pool of idle steam turbine ships has softened rates this year (at least at a macro level). However, there has been some silver lining, which has saved rates from crashing further this year. These factors are discussed below.
* Strong Asian demand due to extreme summer, along with China's revived economic growth, boosted the role of LNG in power generation.
* Japan's LNG imports strengthened during August-September despite the increasing role of nuclear energy in the power sector.
* Lower LNG prices supported the demand in price-sensitive countries such as India, Bangladesh and Thailand.
* The US shipped LNG to Asia via the COGH as Asian prices (despite being lower than in previous years) were at a premium over TTF, coupled with lower shipping rates. As a result, the US-Asia trade also spiked in 2024 over previous levels
All these factors have supported rates this year, and we expect a similar trend to continue in 2025.
Meanwhile, rates will improve year over year as European LNG demand recovers in 2025, absorbing the expanding fleet faster than this year. Moreover, LNG supply will also improve, with 55 mtpa of new capacity scheduled to be added next year -- the majority starting in the US.
Outlook for 2024-25 winter
Drewry is bullish on winter demand as La Nina will result in severe winters. However, Europe's high inventory, which was 94% full as of 4 October 2024, will allow the continent to enter the season with about 100% storage well ahead of its November target. The winter contango will be at play, supporting rates in 4Q24. Thus, we expect rates to reach their year-high by December.
However, the robust Norwegian supply and increased renewable and nuclear output will keep LNG imports in check, with faster restocking commencing in 1Q25. Therefore, we anticipate rates to strengthen in 4Q24 and rally in 1Q25, followed by a slowdown in the subsequent quarters.
Several factors will influence the LNG shipping market. Any escalation in the Middle East due to the ongoing tensions and conflict could spike LNG prices and rates. Robust LNG demand from China, Japan, and South Korea will intensify the competition between Europe and Asia and support LNG rates in the winter. Increased US-Asia trade via the COGH will support LNG shipping economics.
Although the current rates seem lower, they are healthy enough, given that the fleet is undergoing structural changes and expansion. Similarly, demand-supply fundamentals have remained steady as no new capacity has been added so far (given Artic LNG stands stalled), while European demand has been weak compared to previous years.
Long-term outlook: Rates to recover slightly in 2025 but expect considerable growth from 2026-27
Demolitions will pick up in 2025 as fleet supply will outpace liquefaction build-up, compelling shipowners to scrap older vessels. This will provide some respite to the 'oversupply' conditions. However, much of the rebalancing will occur post-2026, with massive capacity additions and higher scrapping amid increasing scrutiny over methane slippage and GHG emissions.
Moreover, ample supply by 2027 will ease LNG prices (we expect them to be around $6-7 per MMBtu), making it affordable and accessible, boosting global LNG demand- especially in China, South and Southeast Asia, and South America.
Conclusion
Thus, the growing LNG trade (given increased supply and robust demand) will absorb vessel supply at a faster pace, further rebalancing the supply-demand fundamentals. Therefore, we expect LNG shipping rates to recover from 2026-27, with a surge in rates for modern 2-stroke LNGCs. Demand for these vessels will grow, especially in Europe, as stringent restrictions over GHG emissions will be implemented through the Fuel EU-Maritime and EU-Fit for 55 regulations.
Source: Drewry