FREIGHT rates for LNG carriers have gone from bad to worse to abysmal. LNG shipping spot rates have sunk to record fourth-quarter lows and they’ve yet to find a floor. Period rates are also falling.

“Rates are softening and they are down to low levels we have never really seen in the fourth quarter before,” said Oystein Kalleklev, chief executive of Flex LNG, during a quarterly presentation this week.

Average steam-turbine carrier spot rates have fallen to a mere $11,250 per day, down 55% month on month, according to Clarksons Securities. At this time last year, rates were 10 times higher: $111,667 per day.

Tri-fuel diesel-engine carrier spot rates are down to $18,250 per day, down 53% month on month. In mid-November 2023, they averaged $165,000 per day.

Two-stroke engine (MEGI and XDF) carrier spot rates are down to $30,000 per day, declining 43% month on month. Rates averaged $197,000 per day a year ago, according to Clarksons data.

Most LNG carriers are on term contracts, not spot, but period rates are following the same downward trajectory as spot rates.

The Baltic Exchange’s latest assessment for three-year period charters for two-stroke LNG carriers was $62,700 per day, down 42% year on year. The one-year period charter assessment has fallen to $43,800 per day, down 57%. The six-month period rate is only $30,800 per day, down 71% year on year.

The one-year period rate for two-stroke-engine LNG carriers is now just $13,800 per day above the average spot rate.

Why are freight rates this bad?

Kallaklev cited multiple reasons for the exceptionally low freight rates.

First, there are not enough LNG cargoes on the water. LNG export volumes typically grow 6%-8% per year, but increased just 1% this year, not because of low demand, but due to low supply resulting from bottlenecks in new liquefaction projects. “That’s one explanation why the spot market is trading poorly,” he said.

Second, Europe has high gas inventories heading into the winter and there is no demand for LNG carriers for floating storage. “If gas prices are in contango, it can typically tie up 30-40 ships in floating storage. This year we have high gas prices, but they are not in contango, meaning you are disincentivised from floating storage.”

Third, there are too many newbuildings being delivered before the liquefaction projects they were chartered against have come online, pushing tonnage into the spot market.

“It’s really about the number of ships for delivery this year,” said Kalleklev. There are 68 new LNG ships coming out of the yards this year (including those that have already entered service), 88 next year, 84 in 2026, 81 in 2027, and 59 in 2028-2030, according to Flex LNG.

“With ample liquidity in the spot market in terms of number of ships, it’s not surprising to see charterers leaning back and fixing ships on a spot basis rather than term,” said Kalleklev. In the first nine months of 2023, there were 157 spot fixtures. In the first nine months of this year, there were 278 — a 77% jump.

“We expect the market to stay poor for the remainder of the year,” Kalleklev acknowledged. In other words, this winter is a bust.

Steam-turbine fleet doomed to the breakers?

If there’s a silver lining in this slump, it could be that the ageing fleet of steam-turbine LNG carriers may finally head to the breakers. The caveat is that this has been predicted for years by executives of companies with non-steam-turbine fleets and it hasn’t happened yet.

According to Flex LNG, there are 202 steam-turbine LNG carriers on the water. Of those, 5% are 30 years are older, 34% are 20-29 years old, 51% are 10-19 years old, and the remainder are under 10 years old.

The reason more haven’t been scrapped yet is “because a lot of these steamships were fixed on 20- to 25-year charters”, said Kalleklev.

Seventy-five of those charters expire within the next 24 months, and Flex LNG predicted that 53 of the ships with charters expiring in this period will exit the fleet, either via scrapping or conversions into floating storage and regasification units. “These ships are now technically and commercially obsolete,” Kalleklev maintained.

There is evidence that this process is beginning, albeit very slowly.

A brokerage reported Thursday that the 2003-built steam-turbine carrier BW Boston (IMO: 9230062) has just been sold on an as-is-where-is basis in the Middle East for around $35m. “A couple more vessels of similar capacity are presently being worked for sale into conversions projects,” it said.

“While selling for conversion projects remains the preferred avenue, the prospect of selling older, less-efficient units for demolition is being given more consideration,” said the brokerage, although it noted that only three LNG carriers have been sold for scrap so far this year.

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