News & Media

11 April, 2019

LNG Market News - Japan

(Source: Kaiji Press News 04/Apr/2019)

Overseas entities show presence in offering LNG ship NBs

Preceded order placement enables flexible proposals

With the procurement of LNG carrier newbuildings, presence of overseas entities has been heightening. As the first Japanese utility, JERA Co., Inc. recently decided to charter LNG carrier newbuildings for 12 years from overseas shipowners. The newbuilding, originally ordered without charter destinations, is now to be deployed in a job, with the deal apparently coming through on the back of owner's ability to present conditions desirable to JERA such as start-up timing of the contract. Other than this, Greek-affiliated owners have been piling up track records in concluding medium-term charter deals, centering on 10 years, with overseas major charterers. Capitalizing on their financial power, overseas owners ordered LNG carrier newbuildings without charter destinations before ship prices went up. With this, they are now responding to demand for charter in/around 2020 by proposing flexible contract periods. It is now drawing attention if such overseas entities will be a threat to Japanese shipping firms in the next large-scale newbuilding talks on contracts to start in mid-2020s.

A Japanese operator source said, "There are newcomers in the LNG carrier field, and they are actually ordering ships. There are also charterers who can accept such ships. What used to be strong points of Japanese companies may not be so anymore". Japanese operators, good at long-term charter deals for 20 to 25 years on newbuilding, have been providing domestic and overseas charterers with vessels with high-quality ship management and competitive charter fees. These strong points will continue to be the backbone of Japanese firms. Yet, demands different from thus far have been coming from charterers. Due to accelerated LNG trading, charterers now have requests for securing flexible fleet by combining 10-year or shorter charters with conventional 20-year or longer charters fixed to transport job for specific LNG projects via newbuilding orders.
There were about 60 LNG carrier newbuilding orders worldwide in 2018, but overseas entities' preceding orders without charter destinations were noticeable as well. Their strategy is to make an advanced order for newbuildings to get competitive ship prices and provide flexible contract periods as well as desirable delivery timing. JERA recently surprised the market by signing a 12-year charter contract on newbuilding with Greek-affiliated GasLog and Angelicoussis Group, respectively, with the contracts coming into force in late 2019 and 2020. Regarding the selection of employing firms, JERA stated, "We made a comprehensive evaluation of their experience in safe transport, required delivery timing, competitiveness in charter fees, and response to global trading." It is possible that one of the factors JERA selected the overseas entities is the desired delivery timing they were able to present. As other deals recently surfaced for deployment of advanced-order vessels, GasLog fixed an eight-year charter contract to start in 2021 with Spanish energy major Endesa, and TMS Cardiff Gas concluded a 10-year charter deal with leading commodity trader Vitol. As such, overseas owners have been coping with charter demands commencing in/around 2020.

Meanwhile, since Japanese shipping firms basically place newbuilding orders upon fixing deployment destinations, "It is difficult for us to respond demand unless deliveries are for 2021-2022," as a Japanese shipping official put it. With their strategy to focus on long-term contracts for stable revenues, "Destination of our fleet ships have already been fixed for 2019," the official claims, with nearly no free ships remaining. With this, entities responding to the current charter demand are mostly overseas owners.
Overseas owners are piling up track records in concluding contracts with leading charterers, on top of ships ordered in advance. TMS Cardiff signed with the Shell Group and French energy major Total, and GasLog fixed a deal with Cheniere Energy, Inc. of the U.S., respectively, for seven-year or so charter contracts to start in 2020-2021, with these owners placing newbuilding orders.

These charter deals are shorter than 10 years and not long-term contracts targeted by Japanese firms. Yet, large-scale LNG projects such as "Mozambique", "Qatar Expansion" and "Golden Pass" are expected to increase demand for large-scale ship procurement from mid-2020s, with medium/long-term transport demand expected as well. These projects are also big target for Japanese operators aiming at expansion in the LNG carrier field. With LNG carriers, operation performance is highly counted, and newcomers are unable to get medium/long-term charter contracts by only capitalizing on their financial power. A Japanese operator source claims, "It is not that overseas entities become a threat in all areas." Yet, others are warning, "Overseas owners dealing with advanced orders can be a threat. This is because there emerge some cases of their fixing deals with major charterers." 

If newbuilding prices will turn on the rising path from here on, competitive edge of ships ordered in advance will be more attractive and overseas entities will become unignorable for Japanese companies.