What The Return Of US/China Trade Means To LPG Shipping

Perhaps the biggest development in the LPG trade as of late has been the return of US to China cargoes. To understand just how important this is, some background would be helpful.

In October of 2019 I published a VIE exclusive report; How Has The US-China Trade War Has Impacted LPG Shipping. The following is an excerpt from that report:

Below shows the top five destinations in terms of VLGC cargo quantity.Source: Data Courtesy VesselsValue – Chart by Value Investor’s Edge

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

Japan has long been projected for flat demand growth. S. Korea, Indonesia, and India have all shown impressive gains keeping demand side volume growth healthy.

But, notice that China’s demand grew relatively little from 2017 to 2018, with very small improvements projected in 2019. This comes in stark contrast to years past.

Source: ShipBrief

Obviously, this stagnant growth is due to the loss of a key LPG supplier. China has been scrambling to replace the large volumes previously imported by the US, and has been successful, though growth has suffered.

But as China shifts suppliers, how does this impact shipping?

A better representation for shipping demand, comes in the form of cargo miles.

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

Here we can see for the first time that while China has maintained the cargo quantity imported, cargo miles have actually dropped. This indicates that those replacements are coming from a shorter distance away.

This shift occurred quite rapidly, highlighting just how fast a major market change can take place along with the corresponding impact on their respective shipping segments.

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

Let’s put this into some context in terms of the VLGC trade. Over the same period cited in the charts above (January 1 – September 26) in 2017 the China to US trade accounted for nearly 8% of global VLGC cargo miles and over 4% of total cargo volumes.

So, who has stepped in to fill the void?

Side note: The below chart not only shows the decline out of the US, but also models the impact from decreasing Iranian VLGC cargoes. This was quite a lot for the market to handle.

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

As predicted in the 2018 report, the Middle East and Australia were prime candidates for US LPG substitution. Australia stepped up with a quadrupling of cargo volumes from 2017 to 2019. While the UAE failed to provide any additional quantities, Qatar, Kuwait, and Saudi Arabia all saw major increases over this period. We also saw West Africa play a meaningful role in this trade flow shift. Finally, Malaysia, which represents a very short haul, more than tripled their export volumes to China over this period.

These trade flow shifts in essence hurt cargo mile demand.

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

The last chart should drive home the importance of the US with regard to cargo mile demand. Notice the much greater role that the US plays in terms of cargo miles as opposed to cargo quantity. Again, recall that cargo miles are a more accurate representation of vessel demand.

The data above over the period of time selected shows that while VLGC cargo quantities were replaced, the shorter hauls meant that only half of cargo miles traveled were actually replicated. This resulted in a net decline of about 4% in cargo miles traveled by the entire VLGC fleet.

That October 2019 report not only detailed what we lost during this trade war, but also provides a road map to the market upon returning to previous trade flows.

But here’s the catch, we aren’t just returning to previous trade flows between the US and China. We are setting records as of late.

Source: VesselsValue – US to China VLGC Cargo Miles by Month

Over the course of the past three months China has imported more LPG cargoes on VLGCs from the USA than any other nation.

But what does that mean for the LPG trade in hard data?

It took a while to piece together data for this next image but hopefully it will illustrate the massive benefit of returning US to China trade, using year over year data for the last three months.

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

2019’s total, which had zero US cargoes, came out to 44.952 Bn dwt-nm. 2020’s total which now includes the US increased to 66.122 Bn dwt-nm, representing a gain of 47%.

Remember, China is by far the worlds leading seaborne importer of LPG. Over the past three months China has taken in approximately 23% of the 68.5 million cbm of LPG that hit the seas.

In the previously cited report, you should recall that LPG volumes into China were also impacted as the trade war hit its crescendo. It was theorized at the time that volume growth was being artificially restricted as supply limitations and consequent unfavorable pricing hindered demand uptake. Upon the curbing or removal of these artificial restrictions, the market was likely to rebound. Not only were these removed, but further impetus was introduced in the form of the Phase 1 trade deal and exceptionally low prices.

Source: Clarksons SIN

Consequently, we are seeing Chinese imported volumes grow considerably.

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

An approximate 10% gain in total seaborne LPG imports into China has occurred over last year. Some new demand has surfaced while other suppliers have seen cargoes substituted out in favor of longer haul US LPG.

Here’s the bottom line, during the past three months the US accounted for 25% of total LPG imports into China in terms of volume, but registered nearly half of all cargo miles.

Therefore, I continue to maintain, that upon the conclusion of the US/China trade war we will see an end to the stagnant cargo mile demand growth in China and resume previous, impressive, growth patterns.

Source: VesselsValue – VLGC Cargo Miles Destination China

Looking at the chart above, it appears that 2020 may mark this reversal.