Ballast bonuses sink shipping activity

The cancellation of two planned LNG vessel charters in Europe this week shows that it’s becoming harder and harder to get hold of an LNG carrier at the right price in the Atlantic Basin.

Danish energy company DONG and Swiss trader Glencore were both in discussions with ship owners about chartering vessels for reloads in early October. Reloading LNG is a method of exporting LNG from a terminal that normally imports the commodity, and is Europe’s principal means of making LNG sales. This week, both prospective vessel fixtures for these reloads were put on hold.

The failed charters are in good company. An attempt by Vitol to find a vessel for a Zeebrugge reload on 3-6 October has gone quiet. Market sources say that the LNG volumes have been sold onto a portfolio player with its own ships. In fact, the only successful shipping fixture in the Atlantic in recent weeks has been the 170,200 cubic metre Veliky Novgorod is fixed to Shell to lift from Nigeria. This is in contrast to a flurry of fixtures in the Pacific Basin.

Disparity

Why are ships getting fixed in one basin and not the other? Daily charter rates are not too different. According to ICIS assessments, costs for a ship with cold tanks in the Atlantic are $5,000/day more than in the Pacific.

No, it is not the headline rate that is the problem, but the ballast bonus. This lump sum figure, also known as round-trip economics, pays for the ship owner to reposition the vessel in a lucrative spot after having deposited the LNG volumes. It also covers fuel, hire and canal fees during the voyage and often the return leg. Considering Suez Canal passage can be upwards of $200,000, ballast bonus poses a significant cost to charterers.

With fewer vessels available in the Atlantic than in the Pacific, ship owners feel able to ask for full round-trip economics in one basin, but not in the other. This is creating a mismatch of price expectations in the Atlantic between ship owners and prospective charterers, and a dearth of fixtures.

Rebalance

So when will ship owners catch up to the market and stop demanding a ballast bonus? It will take the return not of more ships to the Atlantic Basin, but more ship owners to bring down the ballast bonus. There are already a number of Cool Pool vessels open in the Atlantic, but these are all operated by one service – carrier pooler Cool Pool. The Atlantic needs different operators to compete with one another on price.

Until then, traders in search of a vessel do better to sub-charter from a portfolio player like ENGIE, Gas Natural or Shell, whose large fleets enable the portfolio player to optimise their vessels’ positioning and skip the ballast bonus.