LPG carriers market review 3Q24
Small and Handysize LPG carriers
Shipping companies had a tough year. With a few exceptions, most stocks realized double-digit losses YTD.
For shipping investors, this is not a bug but a feature. Epic bull runs followed by ruinous bear markets provide asymmetric opportunities. After the carnage, high-quality floating steel could be bought at a Black Friday discount.
That said, I will use the decline to sniff out the best ideas. In shipping, this means supply-driven markets.
Here is a quote from my article “Shipping 102” about what it means:
Vessel supply is only half the equation. To gain Alpha, we need a shortage of vessels. In other words, the tonne-mile demand growth rate must surpass the fleet growth rate.
However, there is a catch. LNG, LPG, and container markets are demand-driven. All three segments have massive order books and relatively young fleets. On the other hand, demand growth surpasses supply, resulting in a deficit of vessels.
Demand-driven markets have one drawback. A minor decline in demand would turn a deficit into a surplus, leading to cyclical contraction.
Bulk carriers and tankers are supply-driven markets due to low order books, aging fleets, and a lack of shipyard capacity. In addition, tonne-mile demand for crude oil tankers and bulkers remains intact.
Simply put, the best shipping segments to be positioned are those that are supply-driven and complemented by robust tonne-mile demand. A deficient supply acts as a cushion against adverse demand changes.
So, it's time to focus on only the best supply-driven opportunities:
Small/Handy LPG carriers
Ice-class LNG carriers
Capesize dry bulkers
VLCC tankers
Offshore Supply vessels
This is not to say large LPG carriers or any demand-driven market cannot deliver Alpha. They can definitely do it. However, the downside risk is way higher.
A short-lived perturbation in tonne-mile demand will tank the day rates. Conversely, in supply-driven markets, a low order book combined with an aging fleet acts as a margin of safety in case of softer demand.
This is a 3Q24 report on LPG carriers, with a focus on smaller carriers. VLGC and MGC markets could be very lucrative, but as I pointed out, the downside risk is higher. The higher the risk, the lower the risk-reward.
Anecdotal evidence is the dissolution of Avance Gas. In 2Q24, the company agreed to sell its VLGC fleet to BW LPG. At the time of the announcement, the company had four MGCs in order. In its 3Q24 report, Avance announced its plans to sell those vessels to Exmar NV. In other words, Avance exists in the market, and the next step is to wind up the company.
This is not to say BW LPG is wrong. However, BW and Avance are incomparable in many aspects. The former is part of BW Group, a shipping and energy conglomerate with operations in many industries. Hence, BW LPG, as a part of the whole, has different goals, strategies, and risk appetites compared to Avance.
Avance is not a random company, either. Its largest shareholder is John Fredriksen, a household name in the shipping industry who owns stakes in multiple shipping and energy enterprises.
The Avance management team has shown how to play the shipping market. The company exited the market when the probability distribution became less favorable.
Our bias to collect supporting evidence while neglecting the opposing arguments is dangerous. So, the Avance transaction is not the decisive argument. It is more of a cherry on the cake. The deal simply adds more credibility to my thesis that the VLGC market is oversaturated.