Liquefied petroleum gas (LPG) carriers, along with liquefied natural gas (LNG) vessels, are emerging as a new cash cow to feed Korean shipbuilders in 2020. Due to strengthened vessel fuel emission regulations by the International Maritime Organization (IMO) and a shale gas boom, demand for large LPG and LNG carriers, which are high value-added vessels, is expected to increase.
Shipbuilding industry insiders forecast that global merchant vessel orders would reach 588 units in 2020. The figure is up 18.5 percent from 496 vessels recorded in 2019. Orders for LPG carriers are expected to total 40 vessels, up nine from 2019.
LPG ships, together with LNG ships, are representative eco-friendly vessels. However, due to their low building costs, which are half the level of LNG carriers, they have been shunned by Korean shipbuilders. Yet the size of LPG carriers has increase sharply as demand for LPG has surged. Out of the 40 LPG vessels likely to be ordered for 2020, 30 vessels will be very large gas carriers (VLGC) with a capacity of 65,000 DWT, said Clakson, a United Kingdom-based research firm.
“LPG carriers require a high level of technology as they liquefy gas, store it in the hold, and transport it, like LNG vessels,” said an industry insider, adding, “This is why foreign shipowners prefer Korean shipbuilders.”
Growing demand for LPG carriers is fueled by the shale gas development in the United States. Since 2013, the United States has increased exports of LPG. The world LPG seaborne trade volume, which stayed at an average of 66 million tons, grew to 110 million tons in recent 5 years. More than 100 million tons are estimated to be delivered by ship.
A large proportion of the increased LPG supply is shipped to Asia, which accounts for 70 percent of the world LPG market. Europe takes up 18.7 percent. By country, China imports the most with 22 million tons, followed by India with 16 million tons and Japan with 11 million tons. Asian countries, including Japan, are reducing LPG imports from the Middle East, while increasing the volume from the United States. The U.S. share of Japan’s total LPG imports rose sharply from about 10 percent in 2013 to 72 percent as of October 2019. The share of Middle Eastern LPG in Japan’s imports fell from 79 percent to 17 percent during the same period.
The hike in freight rates stimulates the growth in LPG carrier orders. According to Hana Financial Investment, the daily freight charge for VLGC is US$43,563. The rate has been on the rise since the first half of 2018. The payback period for shipbuilding costs of VLGC vessels is 6.5 years, the lowest level since 2015.
As the IMO’s environment-related regulations have gone into effect, orders for LNG vessels are expected to increase. To properly get around the regulations, it is better to equip a vessel with an LNG-powered propeller than a scrubber from the beginning. So, analysts say Korean shipbuilders will be the beneficiary of the regulations as they are competitive in this field.
Clakson said that South Korea swept 32 of 40 LNG vessels ordered in 2019. China, which is closely chasing Korea, won only 7 vessels. Korea also received 66 from globally ordered 72 LNG carriers in 2018, while taking 12 out of the 18 ordered in 2017. The country’s three big shipbuilders are expecting to win orders for 100 LNG carriers that the Qatar government will place for the next 10 years from 2020.
However, there are also difficulties for the rebound of the Korean shipbuilding industry. The nightmare of contract cancellations for drilling facilities (drillships) in the offshore plant sector will persist through 2020 as well. In October 2019, Daewoo Shipbuilding & Marine Engineering was notified of the cancellation of a contract for a drillship with West Cobalt, the 100 percent owned subsidiary of Northern Drilling Ltd, a Norwegian drilling company. Samsung Heavy Industries suffered cancellations for two drillship contracts that it won from Swiss shipbuilder Transocean. Samsung also underwent cancellations for four drillship contracts ordered from Pacific Drilling Co. (PDC) and Norway’s Seadrill and is seeking to sell them to other ship owners.