LPG Shipping Hits Headwinds – But for How Long?


2020 was supposed to be a good year for LPG shipping. Demand growth was expected to be strong like previous years, the US/China trade deal was set to bring back a key long haul, and an extended arbitrage window was set to keep LPG trade lively.

Then C19 hit and the market shifted abruptly.

Demand fell, prices dropped, plunging oil prices closed the arbitrage window, all while China and the US became embroiled in an unproductive blame game reigniting trade war tensions.

All this led to falling LPG shipping rates.

Source: VesselsValue

Only recently have rates shown some resistance to moving lower as we bounce off levels seen in previous bear swings.

This support comes at a time when global economies are being to reopen and oil prices are stabilizing. These are two preconditions for any return to normalization regarding this particular market.

The short-run will be dicey as we claw our way back. But looking further out, using the supply side as a guide, we see clarity in the market and it is promising.


LPG (Liquid Petroleum Gas) and LNG (Liquid Natural Gas) are not the same and require different vessels for transportation. This is because LPG is both pressurized and cooled whereas natural gas achieves is liquid state upon reaching -260°.

Liquid Petroleum Gas is transported on a variety of vessels. Typically, we concern ourselves with Very Large Gas Carriers or VLGCs, as they often dictate the market movement at large.

Though only numbering 297 of the 1,328 LPG vessels on the water, the VLGC class represents over two thirds of global fleet capacity with 24,309,202 cbm out of the 34,767,655 cbm, making it the most crucial class to watch in this segment.


Let’s start with a bit of history here regarding the LPG supply side and introduce the concept of how a cyclical market functions.

From 2011-2014 just 26 VLGCs were delivered into the market. To put the amount of vessels hitting the water during that time into context, the previous four years witnessed 59 deliveries.

The 26 vessels delivered over those four years did not keep pace with demand side gains, causing the market to tighten and rates to rise. Rising rates inspired reactionary owners who responded by ordering more ships, which take many years to build.

Those years passed and 2015 witnessed 35 newbuilds scheduled to launch. This soon began to take its toll on the market, and in July of 2015 rates in the VLGC segment respond to this influx of vessels and began what can only be described as a free fall.

It was at this point where the rapidly expanding VLGC fleet began impacting the smaller classes, as a larger share of the LPG trade was being carried on VLGCs due to greater availability and increasingly attractive economies of scale. This is known as cascading, and as a result demand for the smaller vessel segments began deteriorating leading to a decline in time charter rates for these ships as well.

This bearish trend was reinforced in 2016 with the addition of 44 VLGC deliveries. Once again, for context, the 2015 and 2016 vessel additions amounted to 79 vessels which was just six less than what hit the water during the previous eight years. 2017 saw another busy year with a total of 21 VLGC’s hitting the water.

However, as rates began falling in late 2015, so did newbuild orders. Therefore, VLGC launches slowed down in 2018 with just 10, while the demolition recorded its most active year in some time with six VLGCs retired. This allowed the market to re-balance amid a healthy year for LPG demand growth.

The acceptable pace of deliveries continued in 2019 with just 17 VLGCs added to the fleet, representing 5.1% fleet growth. This was a transitional time as we firmly crossed the threshold from bear into early the early stages of a bull market. More on that later.

With rates setting multi-year records in 2019 we had hope that the 22 VLGCs expected in 2020, representing 6.6%, would be absorbed with minimal market disruption. However, that 6.6% gross supply growth is now a daunting task for a trade that will see minimal cargo mile demand gains in 2020.

(If this was a bit hard to follow, don’t worry. Look at the upcoming charts as a visual aid when reading this once again.)


At just 11.1%, the VLGC orderbook is at one of its smallest points in recent memory.

Source: Data Courtesy of VesselsValue – Chart by Value Investor’s Edge

These vessels can be built in as little as 16 months, however, build times typically average around 2-2.5 years. Three of the 37 vessels currently on order have build times scheduled beyond three years. The point here is that 2022 is open for deliveries but given the complete lack of interest lately in newbuilds, it’s shaping up to be a very slim year.

This lack of interest in newbuilds in general has been an ongoing issue resulting in what is now collectively the lowest levels seen this century.

If you’re familiar with my work you know I talk a lot about market cycles. Since 2015, LPG shipping markets were dominated by a fundamentally bearish market structure, brought on by an acute oversupply of ships.

Source: Clarksons SIN

Avid readers will also remember the nature of shipowners, and how they ultimately spell out these supply side driven cycles through their collective and reactionary behavior to current market conditions.

Yes, ironically enough, the perfect market for contrarian investing strategy brought on by these cycles comes about by market makers failing to act in this contrarian manner.

Which bring us to this key point: The tide has turned. The long cycle is shifting to a bullish fundamental market structure based on an ongoing lack of newbuild orders. Notice the entire LPG orderbook, which includes VLGCs, has remained thin since mid-2017, setting the stage for a much tighter supply side in the years ahead.

As many know, one stage of reconciling an oversupply of vessels is for the market to properly absorb the tonnage. This happened in 2018 as we saw 2019 begin to post higher rates indicating a tightening market despite of these previous deliveries. If a parallel was to be drawn, 2019 would likely represent 2011 in the previous cycle.

For those itching to talk about the demand side impact of C19 regarding organic demand growth, yes, there is an absolute impact that will be felt this year and next. However, there is also an ongoing impact on the supply side with an increased reluctance toward spending and an eye more toward balance sheet preservation. That will be felt further out. Meaning the pain now is likely going to result in a bit more “pleasure” later (for lack of a better description).

Playing off this idea is the notion that if rates are depressed enough now, or for an extended period of time, owners may be swayed to demolish a few more vessels than would typically be seen, perhaps increasing that “pleasure” later on.

Speaking of demolitions, let’s go over the potential for vessel retirements. Below you will find a chart showing the build year and number of vessels for the trading fleet and on order.

Source: Data Courtesy of VesselsValue – Chart by Value Investor’s Edge

First, we must point out, it’s not unusual for these vessels to have a 30 year plus lifespan. Because of this we can see there are very few prospects for retirement in the near term.

But Tradewinds recently theorized that “requirements to dry-dock around 30% of the VLGC trading fleet over the next 18 months could help support charter rates.”

To narrow in on that, we find there are 52 VLGCs with Special Surveys due on or before December 31, 2020. Three of those vessels are on or before 1995 with a total of six built before 2000.

In 2021, we find a total of 72 VLGCs due for their Special Surveys, with 11 of those built on or before 1993. Here is where we likely find the greatest potential for demolitions over the coming 18 months.

Before we leave the VLGCs let’s take a look at historic and current asset prices.

Source: Clarksons SIN

The chart above shows a fixed aged five-year-old vessel price stopping at Q1. Again, this is important since it shows the asset price correlation to that of charter rates (see previous earnings/orderbook chart for confirmation).

Of course, Q2 turned out to be not as good and that will be reflected in this chart once it’s updated by Clarksons.

But in the meantime, over at VesselsValue, it is reported that since April 1, 2020 until July 9, 2020 these five-year-old VLGC’s have dropped approximately 16% in value. A new vessel hitting the water is down nearly 14% and a 10-year-old asset is down by 16.5%.

Further asset price drops of this magnitude seem unlikely as rates are beginning to stabilize. Additionally, IMHO, $61 million for a five-year-old VLGC, kind of seems a little underpriced. Perhaps some owners feel the same way and increasing S&P activity is on the horizon?


The main demand epicenters for LPG are East Asia and India. Economic normalization here is key to reestablishing organic demand. Fortunately, several East Asian nations appear to be making great progress toward this end. Unfortunately, India is facing a challenge as C19 cases continue to tick up. As of right now, Clarksons is projecting essentially flat year over year LPG growth for 2020.

Source: Clarksons SIN

This checks out with data and projections from VesselsValue as well, showing early gains in the year now being stifled by negative year over year trends.

So, remember the previous point about the market needing time to absorb and properly digest tonnage? Right now, we are seeing stagnant demand growth but the newbuilds will keep coming. This will present a temporary headwind.

Especially when you combine that with the prospect that demand growth in 2021 is also likely to be impacted by ongoing economic turmoil.

So, with that in mind, we have likely taken a step backward here in the LPG shipping trade. The good news is that step backward has not set us on a radically different path. Meaning the longer-term outlook which has been discussed since 2018 remains intact, timelines have just been pushed out a bit.