Here’s Why LPG Shipping Demand Is Red Hot

Ever since hitting an anticipated cyclical bottom back in 2018, the LPG shipping market has witnessed consistent progress highlighted by steady market demand which has slightly outpaced new vessel capacity.

Before Covid-19 I had opined that diversified, growing, retail oriented, predictable demand was a major attraction to LPG shipping, thus providing a solid base to achieve stable cargo mile demand gains.

But last year, that consistency was called into question – in a good way. As some might recall, my 2021 LPG Shipping Outlook, published December 10, 2020, had what I thought was one of the bolder predictions in the series of forecasts for that year, projecting 10%-12% demand side growth while most were forecasting around the 5% mark, or even less. Those double-digit demand side projections, as we now know, nearly came to fruition with approximately 9.78% cargo mile demand growth for the VLGC class according to data from VesselsValue, with Clarksons estimating 11.8% for the entire LPG segment.

My 2022 forecast witnessed slightly more subdued expectations, with 7%-9% cargo mile demand gains expected, against the consensus of approximately 5%, yet again.

This discrepancy in expectations is a big deal, as it not only informs us of the ongoing and sustainable nature of these demand side gains but it also determines the degree of market tightening as we head into an expected influx of vessel deliveries in 2023.

As of May 12, 2022, VesselsValue estimates a YTD cargo mile demand gain for VLGCs of 9.64%, with the entire LPG segment registering an 8.55% gain, putting our forecast right on track.

These are not only impressive numbers for the segment, but LPG is currently experiencing the most cargo mile demand growth of any shipping segment so far in 2022.

While these figures were anticipated, it’s always wise to take a deep dive and make sure the market is functioning as projected. Therefore, my attention turned to the notion that perhaps short-term factors may be at work, bolstering these figures.

Given the price action for energy lately, which increases arbitrage opportunities, and in the case of LPG (ethane) can increase substitution to and from naphtha, this was a legitimate point to explore. Therefore, it became important to determine just how much of this growth is actually sticky organic demand compared to short-term fleeting market responses.

This led me down a rabbit hole where I continued to look for anything which would support the notion of these knee-jerk market responses having a meaningful impact.

In the end, I was wrong about one thing, these aren’t knee-jerk or short-term market responses. In fact, for 9 out of 12 months in 2021, LPG (ethane) was more expensive than naphtha, which decimated the argument of ethane substitution having a bullish impact – in fact it was bearish for most of the year which weighed against cargo mile demand gains.

It will be interesting to see what happens since that bearish dynamic is reversing as we move through 2022 with most months to come projected to favor ethane substitution. As of May 10, swaps market indications show European propane averaging an around $120/t discount to naphtha out to the year-end, while Asia-Pacific propane is averaging a slimmer $70/t discount. Both spreads are larger and longer in duration than those witnessed in 2021 and should theoretically inspire substantial propane feedstock substitution at naphtha’s expense.

All of this suggests that over the course of 2021 and 2022, the greatest potential for this substitution dynamic to influence the market in a bullish manner will happen in the back half of this year.

This is being met with another potentially bullish development, the elimination of Russian LPG cargoes to Europe with replacements coming from the US Gulf.

Russia did export approximately 40,000 b/d of short haul seaborne LPG to the global markets, and about a 100,000 b/d via overland markets, representing 140,000 b/d or around 1% of total global LPG demand, with much of that going to Europe.

As Europe seeks to replace that supply, they are looking toward the United States. Those 140,000 b/d are roughly equivalent (depending on speed traveled, port efficiency, etc.) to five extra VLGCs per month out of the US Gulf. Looking at 2021’s full numbers, this represents a possible 2.1% increase in journeys traveled based on this dynamic alone. The impact of this should also become more prevalent in the second half of this year.

Now, let’s put those last two topics together for another twist. If we look at naphtha coming out of Russia, exports total approximately 500,000 b/d, or nearly 4 times more than LPG.

Consider that the global Naphtha market volume in 2020 came in at 313.1 million tons while the global LPG market attained a volume of about 325.44 million tons in 2020. Both are relatively similar in size, so the cuts out of Russia will have different impacts on global prices. What that means indirectly for LPG is that the spread between propane and naphtha will widen in favor of propane being the preferred feedstock for flexible ethylene steam crackers.

This is likely some of what is being priced into those forward (ethane/naphtha) curves discussed earlier and therefore proper considerations should be factored into LPG carrier demand as well.

Since we are on the topic of price, Europe, and Russia, let’s quickly discuss the ongoing propensity for arbitrage trades to play a role in seaborne LPG demand.

Disruptions due to Covid, high energy prices, record energy demand, the Russia/Ukraine war, and an uncertain economic backdrop all impacted trade flows around the world, which have consequently impacted LPG inventories/availability and therefore prices.

These higher prices have even started to carry over to the US.

Source: Clarksons SIN

However, it is still exporting at positive arbitrage values to Europe and Asia prices in several key areas remain well above the USA.


Given the United States’ increasing daily production, export capacity, and relatively flat domestic demand over the same time, it is expected that low inventory levels will be less of a concern than they were a decade ago while prices remain relatively subdued compared to international markets.

This would indicate an ongoing focus on exports over stockpiling on the part of the US, allowing that the arbitrage window to remain open for an extended period of time.

Finally, before we leave the demand side section, it seems relevant to mention that during this latest examination of the LPG market a thorough review of trade routes was conducted. This was to determine if any outliers had emerged (other than the Russia/Ukraine situation) and to ensure that this latest round of impressive cargo mile demand gains was actually rooted in organic demand growth in key nations.

The data shows that the main drivers of this growth continue to be nations which were anticipated to register the highest uptake of organic and sustainable (long-term oriented) demand growth.

All of this, when taken together implies that these cargo mile demand gains are very sticky for the foreseeable future.