Bigger LPG carriers could struggle to maintain recent strong rates from the fourth quarter as fleet growth outstrips an upturn in trade.
But smaller sizes should remain stable, with some support coming from the ammonia business, according to UK valuation platform VesselsValue and Norwegian shipping research company ViaMar.
In their fourth quarter market forecast, the companies predicted that, as Opec+ production cuts are reversed, Middle East exports are set to increase.
But lower US oil production is likely to result in fewer US LPG exports.
These US shipments usually involve longer sailing routes, so any trade growth "is unlikely to meet the firm near term fleet growth, resulting in a weaker market balance", the report concluded.
UK shipbroker Clarksons lists 13 VLGCs due from shipyards before the end of the first quarter next year, with 64 on order in total, or 21% of the world fleet of 308 ships.
Smaller might be better
"These lower earnings are likely to affect the VLGCs. The outlook for LGCs and MGCs are more balanced. Besides, they will find some support in ammonia trade," VesselsValue and ViaMar said, referring to large and mid-size gas carriers.
Other analysts are more optimistic for the sector, however.
The Baltic Exchange VLGC index stood at the equivalent of $44,043 per day on Wednesday, up 1% compared to the prior month.
Norwegian investment bank Cleaves Securities said rates were "holding up remarkably well", despite US propane and propylene exports falling 9% year-on-year so far in September.
"With the Atlantic trading at a premium to the Middle East Gulf, westwards ballasters could support rates in the east," Cleaves added.
Another Norwegian investment bank, Fearnley Securities, said the market has "come back to life" for loadings in the Middle East in the second half of October.
Cargoes uncovered
"There are still a few uncovered cargo requirements which coupled with strong activity from the US Gulf should keep rates largely at status quo as owners would more likely ballast West if unable to secure favourable rates in the East," it added.
Fearnley analysts Espen Landmark Fjermestad, Peder Nicolai Jarlsby and Ulrik Mannhart said: "Whilst petchem margins and retail demand have held up remarkably well, we argue the strength in rates primarily is due to inefficiencies on the supply side where we now count as many as 45 VLGCs presently sitting in China and India."
These delays, and Panama Canal congestion, are keeping the market elevated, they argued.
"Looking at the position list for the balance of the year, there is reason to believe the fourth quarter will also prove to be a strong one," the analysts added.
The VesselsValue and ViaMar report predicts that LPG carrier scrapping activity is likely to pick up and newbuilding activity is expected to remain muted.
Pulling away from opex vessels
After a tough period earlier in the year when rates were languishing near operating cost levels at $10,600 per day, VLGC earnings improved over the summer as a high share of cargoes heading to Asia maintained cbm-mile demand.
Slightly higher crude values have made LPG more attractive again as a petrochemical feedstock.
"Shipping demand for the petchem gases is likely to see a modest positive development as local imbalances will remain, and economic growth return from the Covid-19 pandemic," the two companies added.
The outlook for shipyards is weak in terms of new LPG carrier contracts, but there should be a "bottoming out" of the orderbook towards the latter end of 2021.
Asset values have scope to improve
"In conjunction with increased new ordering activity this should lead to tighter utilisation for the shipyard industry. Such development should eventually give appreciation to asset values," VesselsValue and ViaMar said.
"Supporting this notion is the world-sweeping release of financial support from central governments to secure economic activity, and thus seaborne demand post the pandemic."
Turning to tankers, the report foresees increased scrapping of vessels in autumn and winter as a result of lower freight rates and many vessels facing their fourth and fifth special surveys.
"In addition, several older tankers could be released from storage duties and are likely to be scrapped," VesselsValue and ViaMar said.
The companies are predicting a continuation of downward pressure to asset values as ordering activity and expected earnings will not be enough to support higher demand for shipyard services.
Highest earnings for five years
Average earnings for vessels in 2020 will still be the strongest since 2015.
"Next year we expect rates to be weaker for all tanker vessels before rebounding in the second half of 2021 and through our last projection year of 2023," the report said.
The companies are estimating that VLCC spot earnings for the third quarter will come in at $16,000 per day, following a strong $75,000 per day in the second three months.
MR tankers also had a strong second quarter with average earnings of $25,000 per day, but will only average around $8,000 per day in the third period, the report forecasts.
In its latest Oil & Tankers Trades Outlook report, Clarksons Research said that tanker demand is projected to rebound in 2021 by as much as 6%.
Storage danger
"However, further unwinding of floating storage — and lower levels of capacity undergoing a scrubber retrofit — are expected to lead to continued supply-side pressure, against a backdrop of underlying tanker fleet capacity expansion of 2%, following growth of 3% in 2020," the UK company said.
Overall, the VesselsValue and ViaMar research suggests a steady recovery in the world economy and seaborne trade through the remainder of 2020.
Uncertainties surrounding the coronavirus breakout, the trade war and volatility in oil prices are governing any business decisions currently being made, the companies said.
"Containment measures and the potential for a second upspring of the coronavirus remain a great uncertainty for global trade. Having caused a recession, the timing and strength of a return to growth will impact the way forward."
