---

Continuing weak demand and excess tonnage are expected to depress liquefied natural gas (LNG) shipping earnings in the near term. But longer term the sector could face vessel shortages as ordering slows and liquefaction projects come on stream, according to the LNG Shipping Market Annual Review and Forecast report published by shipping consultancy Drewry.

Presently, the LNG shipping market faces tough times. The fleet continues to grow even though its trade has declined and LNG supply has stagnated. The global LNG trade fell for the second consecutive year in 2013 by 1%, as many liquefaction sites faced unplanned shutdowns, which resulted in tight supplies and higher prices.

Japanese imports rose just 1% in 2013 and are expected to stagnate as the country looks to restart its mothballed nuclear power plants, in the face of rising fossil fuel import costs and a depreciating currency. Imports to Europe declined 23% due to lower demand and increased reliance on piped gas. Likewise, imports by the US and Canada fell 45% and 42% respectively because of surplus natural gas production. Meanwhile, insignificant additions to global liquefaction capacity and unplanned shut-downs led to a tight LNG supply during the year.

Despite weak demand, LNG vessel capacity rose 5% in the 18 months to June 2014 to 56 million cubic metres. Drewry is forecasting that fleet growth will accelerate at an annual rate of 8% both this year and next to reach 66 million cubic metres by the end of 2015.

"A deadly combination of expanding vessel fleet, limited cargo availability and falling trade caused short-term freight rates for conventional LNG carriers to decline through 2013 and the first half of 2014," commented Drewry’s lead gas shipping analyst Shantanu Bhushan. "Although there are plans to add 64 billion cubic metres per annum of liquefaction capacity during 2014-15, major concerns for shipowners are the timely completion of these projects, the possible restart of Japanese nuclear power plants and the fast rising vessel fleet. As a result, the outlook for unchartered vessels over the next 18 months is not favourable and we expect spot and short-term freight rates to remain under pressure."

However, according to Drewry, demand is expected to recover strongly "in the latter part of the decade" as new production comes on stream, on completion of various projects under construction in Australia and North America.

Bhushan elaborated: "Drewry cautions shipowners that the anticipated rise in cargo traffic may take them by surprise. We expect that the LNG shipping industry will need many more vessels in the latter half of the decade than are currently on order."

Source: Drewry Maritime Research