Major Turnaround In LPG Shipping By 2018?

Major Turnaround In LPG Shipping By 2018?
JJoeri van der Sman
Value, contrarian, small-cap, shipping
The LPG shipping market is currently in a depressed state due to oversupply of transport vessels.

However, the projected growth in demand for seaborne LPG trade is impressive.

I believe this growth will turn the market from oversupplied to very tight within the next 12-18 months.

Investors who act now, while valuations remain depressed, have an opportunity to generate outsized returns through 2018-2019.



Note: This article was originally published as a guest article April 20th on Value Investor's Edge, a Seeking Alpha subscription service.

This article is about liquefied petroleum gas ((NYSE:LPG)) shipping and focuses on the economics of the largest vessels on long haul trades. The largest ship variant is a VLGC, or very large gas carrier, an LPG ship with a capacity of about 84k cubic meters (cbm). LPG shipping has shown very large growth rates over the past couple of years, but an overbuild of vessels, with deliveries scheduled between 2014 and 2017, has resulted in an oversupplied market and low day rates. In this article, I look at the dynamics from a macro point of view.

The normal article layout would be an overview of market dynamics with a conclusion at the end of the article. However, this time, I reversed it because I think the outcome of my simple market model will induce a heightened level of investment interest.

My model for future supply and demand characteristics in the LPG VLGC market

The graph pictures the total global fleet of VLGCs, with currently around 250 vessels on the water. The red line shows my approximation off the demand for these ships. Currently, the market is severely oversupplied, and to make matters worse, there is still a fairly large number of deliveries left in 2017. Gladly, the demand for these vessels is quickly growing, and I anticipate that the market will move from an oversupplied market in January 2018 to an actual shortfall of vessels by the end of 2018. If companies do not start ordering these vessels soon, this will turn into a heavily undersupplied market by mid-2019 and presumably high day rates.

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