Firm freight outlook coupled with attractive valuation make small LPG coasters an attractive buy at the moment.
LPG shipping has been marred by an oversupply of vessels, with the Drewry LPG TCE index near its five year low. However, small LPG Coasters (1,000-5,000 cbm) are outperforming their larger counterparts for the last one year (A value greater than one signifies outperformance as shown in the figure below).
Drewry LPG TCE Index (Base: Jan-2010)
Source: Drewry Maritime Research
Relative performance of LPG Coasters
Source: Drewry Maritime Research
Firm intra-regional trade and a thin orderbook provide a bright outlook for LPG coaster freights
LPG coaster fleet growth has been negative (-1% per annum) over the last two years. Meanwhile, intra-regional trade of LPG and olefins has continued to grow in the Atlantic and Pacific basins; which has supported employment of small coaster vessels.
Intra-regional trade (Olefin and LPG ‘000 tonnes)
Source: Drewry Maritime Research
Imports of olefins by China have grown at a CAGR of 10% over the past two years. Although China’s LPG imports growth have also been strong, what makes olefin trade beneficial for small vessel owners is that majority of olefins are being imported from the Asia-Pacific region. In 2017, China imported 91% of its olefin gases from the Asia-Pacific region and these short haul voyages were beneficial for small LPG coasters. In addition, ship to ship transfer operations have continued to provide valuable employment in this sector.
China LPG imports (2017)
Source: Drewry Maritime Research
China olefin imports (2017)
Source: Drewry Maritime Research
Forward EBITDA to asset value ratio for LPG coasters is attractive at the moment
Asset – EBITDA ratio (5 year old, 3,500 cbm p/r vessel)
Source: Drewry Maritime Research
On the supply side fleet growth in the small LPG segment will remain capped over the next two years on account of a thin orderbook and high demolitions. At the end of June, there were only six vessels on order in 1,000-5,000 cbm category, representing meagre 1.6% of the current small LPG coaster fleet.
Overall, we believe that current fundamentals point to a firm freight market for the next two years.
The Forward asset value-EBITDA ratio for a 5-year old pressurised vessel of 3,500 cbm is currently 8, which is much below its four year average (2014-18) of 13.5. In the circumstances, the small LPG vessel market offers in our view an attractive investment opportunity.
Source: Drewry
