Seasonality plays a pivotal role in shipping markets. Two prime examples are liquefied natural gas (LNG) shipping and container shipping. At this time of year, LNG shipping rates usually increase as importers book more cargoes in preparation for winter fuel demand, and box rates rise as U.S. retailers bring in their inventories.
LNG rates are now seasonally strengthening, following their normal pattern. But container rates in the trans-Pacific remain stubbornly weak and are actually falling further.
LNG shipping rates strengthen
“Many expected 2019 to be the year of the LNG carrier,” said Stifel analyst Ben Nolan. “Those high hopes failed to materialize” and rates have been “disappointing,” but finally, “that has begun to change,” he said, pointing out that rates are now double April levels.
According to Clarksons Platou Securities, rates for tri-fuel-diesel-engine LNG carriers are now $70,500 per day, up 6.8% week-on-week and 8.5% month-on-month.
Nolan explained, “Some of that can be attributed to the surge of new export capacity in the past several months (Corpus Christi train 2, Cameron train 1, and Freeport train 1), which have collectively added about 4% to global LNG production in the course of about three months.
“There has also been a surge of vessel contracting by traders, which is likely in advance of a storage trade. While Asian LNG prices are at unbelievably low levels of about $4.50/mmbtu [million British thermal units] and the forward curve tops out for this season at $6.90 in January (nearly half of last year’s peak), the $2.40 spread should be sufficiently high enough to make an arbitrage profit over the course of the next several months.”
According to Evercore ISI analyst Jon Chappell, “Available tonnage has contracted to limited levels in most export regions. We foresee recent positive momentum in rates gaining a head of steam over the coming months.”
Last year, LNG spot shipping rates hit an unusually high level of $200,000 per day in November, and then collapsed in subsequent months as Asian LNG commodity prices fell.
Nolan believes this year’s peak pricing will fall short of 2018’s for three reasons. “First, [the tariff issue] and not giving in to Trump may keep the Chinese from aggressively buying [U.S. LNG] for inventory. Second, there has been investment in land-based storage infrastructure, so the need for floating storage is not as great.
“And third, and perhaps most importantly, the massive Power of Siberia pipeline from Russia is scheduled to start flowing gas to China on December 1. At full utilization, this equates to 24 mtpa [million tons per annum] of LNG capacity, which compares to 59 mtpa of Chinese LNG imports over the past 12 months.”
In previous years, the seasonal increase in LNG rates has led to large gains for U.S.-listed LNG equities. This year, stocks are being weighed by broader investor concerns on trade disputes and recession risks, which could pressure LNG shipping stocks despite seasonally higher rates.
“LNG shipping stocks are trading at recent lows, with an intense focus on trade wars, recession risks and low gas prices dictating sentiment and largely ignoring historical seasonal trends and recent developments,” acknowledged Chappell.
But on a positive note, low stock pricing could give LNG stocks more room to run. According to Nolan, “LNG shipping equities are at much lower levels, down 29% relative to this time last year and in our view not pricing in much impact from stronger cash flows in 3Q19, 4Q19, and 1Q20. Furthermore, the seasonal tightening of the market should be effectively immune to trade talks, tariffs, and even global economic activity. Thus, we believe it is a good time to add a basket of the names.”
Public companies with spot LNG shipping exposure: GasLog Ltd (NYSE: GLOG), Golar LNG Ltd (NASDAQ: GLNG), Flex LNG (NYSE: FLNG), Cheniere Energy (NYSE: LNG)
Trans-Pacific box rates still falling
In the container shipping sector, the question looms larger with each passing week: What is going on in the trans-Pacific trade lane? Despite relatively positive signals from other transport channels, including trucking, the cost to ship a box from Asia to the U.S. West Coast continues to slide. That price is considered to be a relatively good proxy for demand.
Trans-Pacific container pricing is tracked by a daily index produced by Freightos (SONAR: FBXD.CNAW). The current price is $1,287 per 40-foot equivalent unit (FEU), 38% below the price one year ago. Traditionally, the shipping cost on this route starts its ascent in early August. This year, the price has declined in August.
The negative trend seen in the Freightos index is mirrored in the weekly index put out by Drewry on the year-on-year change in the cost of container shipments from Shanghai to Los Angeles (SONAR: WCI:SHALAX). In the latest week, this data shows a year-on-year drop of 36%, the largest decline since January 2018. More FreightWaves/American Shipper articles by Greg Miller
Public shipping companies with exposure to spot box shipping rates: Maersk Line (Copenhagen: MAERB.C.IX), Hapag-Lloyd (Frankfurt: HLAG.D.IX), Matson (NYSE: MATX), Evergreen Marine (TWSE: 2603), Hyundai Merchant Marine (KS: 011200)
Editor’s note: Freightos has a business agreement with FreightWaves that includes editorial coverage.