Soaring VLGC freight rates over the past two months have strengthened the grip of shipowners and trading houses with time-chartered tonnage, on the LPG spot market, according to traders and analysts.

Shipowners and long-term charterers such as Japanese trading houses Astomos, Eneos Globe and Itochu, South Korea's E1 Corp. and SK Gas, as well as traders Petredec, Vitol and Shell, have more flexibility and find themselves in a better position to buy cargoes cheaply and enjoy profit margins, they added.

"It would be natural to assume that those who have competitive shipping would be better placed to buy more cargoes," a shipowner said, echoing analysts who have said that at current rates, companies that are long on vessels have a significant edge.

Daily spot rates for Persian Gulf-to-Japan voyages have more than tripled since the end of February and beginning of March to more than $130/mt. Houston-Japan rates were assessed at $270/mt Friday, up 60% from the lows seen on February 10, while Houston-North West Europe rates have surged 81% to $105/mt since February 21 when it was the lowest seen this year, according to Platts data.

On Monday, the rates saw a slight downward correction after hitting record highs almost daily since the end of March.

"The point is the premium. With freight going up very quickly, premiums have to go up as well, but there is a high risk of losing money at this level," a Western trader said.

Shipowners, brokers and traders attributed the spike in freight rates to US cargoes flowing to Asia and Europe, especially through the summer. Other reasons for the soaring rates were a rebound in Middle East spot trading after a lull earlier this year, VLGCs being committed to contract cargoes, ships being tied up on the Iran-China route, and congestion at Indian ports.

US LPG exports have been picking up with an exceptionally severe winter drawing to an end.

"I expect growth in both propane and butane exports this year, reaching a total of 13.7 million mt, which will clearly be a fundamental supporting longer hauls and driving up vessel demand," said Erik Nikolai Stavseth from Arctic Securities. He compared this to 2013 when exports stood at around 9 million mt.

US LPG export capacity is expected to rise to more than 31 million mt by 2017, though taking into account current production profiles and domestic demand, the amount available for export is estimated to be closer to 21.5 million mt.

HIGH FREIGHT OVER THE NEXT YEAR

Tightening vessel supply and higher freight were expected to last till the second half of 2015 or even into 2016. This had dampened market activity and pulled down prices between late March and mid-April.

"Considering the supply/demand balance of ships, we think it will last until at least the second half of 2015. And now we have entered a totally different, new market after Baltic rates rose above $100/mt," an Asian shipowner said, adding that the Persian Gulf-Japan route could jump to above $200/mt.

"So now players think that Baltic [freight rates might] never come down to $60 levels again, and [are looking] to see what level we can expect for next year, not only for the freight market but also CFR term contracts," he added.

DNB Markets said in a recent report that time-charter equivalents, or TCEs, had soared from a low of sub-$20,000/day to just under $60,000/day last year, but by the end of 2013, TCEs were below $40,000/day.

This year, TCEs jumped from a low of $20,000/day around early February to above $90,000/day at the beginning of April.

"To us this $96,0000/day is a confirmation that the shipping part of the supply chain is capable of taking out the lion's share of the fundamental arbitrage and, combined with the continued expansion of the US export capacity, we reiterate our belief that 2014 will be an all-time high for LPG shipping," DNB Markets added.

In December last year, DNB Markets said that VLGC rates could rise to $200,000-300,000/day in late 2015 and beyond, from $37,000/day prevalent at the time.

Traders holding time-chartered tonnage, such as an oil major which late last year took several vessels for a five-year period at high-$20,000s/day, now stand to gain with freight shooting up, sources said.

"This is where shipowners could lock in some long-term revenue and get them through the soft patch we still will likely have in 2016," said Stavseth, who sees spot freight rates averaging $45,000/day in 2014 but falling to around $30,000/day in 2016.

A shipowner source pointed out that VLGC time-charter rates for a six month- to one-year period swung from lows of $30,000/day to highs of $60,000/day, though he added that current charter rates were difficult to assess, as "we are in untested waters."

Shipbroker Lorentzen and Stemoco said a lack of available tonnage means charterers fixing on far-forward dates are faced with a record freight rate of $120,000/day.

Others such as Shantanu Bhushan, the lead research analyst for gas shipping at Drewry Maritime, are less bullish. While spot rates are set to stay high until May-June because of tight tonnage in major loading regions, "they will start their downhill journey gradually thereafter," he said. "However, it should remain firm on historical comparison," he added.

The price of propane cargoes for delivery along the Singapore-Japan route in the second half of May was assessed at $832/mt on March 27, the lowest since June 4 last year, when it was at $825/mt. Prices held below $880/mt until April 21.

"As backwardation had lasted a long time during the winter, all importers have tried to defer LPG purchases as much as possible, buying minimum quantity every month," an Asian trader said.

Around Easter, however, when prices were relatively low, Astomos bought at least two cargoes -- one from Kuwait Petroleum Corp. via tender and another from Gunvor, sourced from US Targa Resources. Astomos was also said to have bought other cargoes, but this could not be confirmed.

The recent purchases prompted a rebound in regional LPG prices to the highest since early February to above $920/mt, though rising freight is capping the rally, traders said.

"We have a choice to buy CFR and sell freight, or buy FOB. It depends on the ship's itinerary, waiting time, the state of the CFR market and FOB premium levels," a shipowner said.

"Taking those points into consideration, we bought some FOB to utilize our ship. We also sold freight to others. If the market is climbing, we can sell CFR at the same level or at a higher premium than the freight rate," he added.

NEWBUILDS IN THE PIPELINE

Shipowners and analysts said there were 1,195 LPG carriers at present, with a capacity of 1,000 cubic meters or more, totaling 21.4 million cu m. Of these, 156-157 are VLGCs accounting for 12.6 million cu m, they added.

Bhushan said 146 new LPG carriers, including 73 VLGCs, are lined up for delivery during 2014-2016.

"It should help ease tight vessel supply conditions over the medium term. However, only nine more are scheduled for 2014 delivery, indicating a tight situation for the current year," he said. "Newbuilding activity almost trebled year on year by end-March 2014," he said. There was still scope for a few more new orders, he added.

The price of a newbuild is between $75 million and $77 million, based on new orders at South Korean yards. However, a newbuild at a South Korean yard ready for prompt sale has spiked to $85 million-90 million, Bhushan said.

The majority of newbuilds are slated to hit the market from the second quarter of 2015 through Q2 2016 for now, but as more orders come in that might change, Stavseth said.

"I don't think it's causing a rush as I have spoken to several owners to check if shipyards have been willing to move deliveries closer to get an earlier delivery, and they say yards are not able [to do this] as they are fully booked," he added.