The shipping rates for liquefied natural gas (LNG) transportation have plummeted to record lows due to a combination of factors. These include an oversupply of new vessels, delays in launching new liquefaction projects, and reduced demand for floating storage in Europe, as the specialized publication Lloyd’s List reported.
Historic Lows in Spot Freight Rates
In the fourth quarter of 2024, spot freight rates for LNG carriers hit historic lows. According to Clarksons Securities, the average daily rate for steam-turbine-powered ships dropped to $11,250, a 55% decline from the previous month and just one-tenth of the rates seen a year ago ($111,667/day). Similarly, vessels equipped with tri-fuel engines and two-stroke diesel engines (MEGI and XDF) saw steep rate reductions of 53% (to $18,250/day) and 43% (to $30,000/day), respectively.
Declining Long-Term Charter Rates
Most LNG carriers operate under time-charter contracts, and rates are also declining. For instance, a one-year charter for two-stroke LNG carriers now averages $43,800/day, a 57% drop from the previous year.
Market Weakness and Supply Issues
According to Oystein Kalleklev, CEO of Flex LNG, limited demand has significantly weakened the spot market. LNG export growth, which typically ranges between 6% and 8% annually, has been limited to just 1% this year due to global delays in bringing new liquefaction projects online.
Kalleklev also notes that Europe has ample gas reserves for the winter, reducing the need for floating storage. Unlike in previous years, when gas prices encouraged the immobilization of 30 to 40 vessels, this year’s high prices have not had the same effect due to the absence of a contango in the markets.
Oversupply of LNG Carriers
The market is also contending with an oversupply of available tonnage. In 2024, 68 new LNG carriers will be delivered, with an annual average of 84 additional units anticipated between 2025 and 2027. Many of these vessels were constructed for liquefaction projects that still need operation, forcing them into the spot market. During the first nine months of 2023, 157 spot contracts were signed; this figure has surged to 278 for the same period in 2024, a 77% increase.
Aging Fleet Facing Decommissioning
The current situation may signal the beginning of a phase-out for older steam turbine-powered vessels, which are considered technically and commercially outdated. Two hundred two such ships remain in operation, 39% over 20 years old. However, many of these vessels are tied to long-term contracts that have yet to expire.
According to Kalleklev, 75 of these contracts expire over the next two years, and at least 53 vessels are expected to exit the fleet for recycling or conversion into floating storage and regasification units (FSRUs). Signs of this trend are already evident: for example, the BW Boston, a steam turbine vessel built in 2003, was recently sold for $35 million for conversion in a Middle Eastern project.
Challenging Outlook
The market is facing a harsh winter with low demand, excess supply, and a need for incentives for floating storage. Flex LNG predicts that current conditions will persist at least through the remainder of the year.