Information for the SSY BLOG
Supporting LNG growth at SSY
LNG is a fast-growing energy source for a world which needs quick solutions to tackle climate change and air pollution. Gas demand globally rose almost five per cent last year, according to the International Energy Agency, more than double the pace of growth for oil demand. Energy majors and trading houses alike have pivoted towards the commodity which some analysts predict will overtake oil as the world’s primary energy source.
This rising demand for LNG has not only impacted the global gas tanker fleet which now stands at 614 carriers, with a further 140 on order, but has also seen a change in the way in which shipping risk is managed. As a leading international shipbroker, Simpson Spence Young has reacted to this change by building its LNG team and offering freight derivative products to clients.
“There has been a huge change in the LNG freight market over the last six years,” explains Toby Dunipace, Head of LNG at Simpson Spence Young. “The market has moved from long-term 20-year port to port, government contracts to a becoming closer to a more traditional tanker spot market. We estimate that around 25%-30% of the market is now traded on a spot basis. As traders move into the market, taking aggressive short-term positions, they are beginning to think about covering these positions with an FFA.” Added to that, sellers of LNG are committing to contracts with non-destination clauses, allowing for further flexibility, that increases tradability.
With freight rates moving from $40K to over $140K per day over the course of the past six months, for the standard trading 160,000cbm TFDE, freight is certainly a risk which needs to be managed.
BLNG 1: Gladstone / Tokyo round voyage, 160,000 cbm
Integral to the success of any derivative market is a reliable, transparent and independent benchmark against which trades can be settled. In August 2019 the Baltic Exchange went live with the second of its three route assessments for the LNG market. Simpson Spence Young sits on the panel of brokers providing professional twice weekly assessments for the index. In July the first trade against the index was concluded as a swap between Glencore and Total Gas & Power.
Duncan Dunn, Director at Simpson Spence Young Futures says that the demand for LNG derivatives is there.
“Risk mitigation strategies are needed and the FFA is best tool,” he explains. “An FFA allows those with fixed rate exposure to go to a floating rate, and allows those on a floating rate to fix their exposure.”
Critically, he notes that energy majors need to trade in a compliant and transparent fashion. Regulation is important and the solid regulatory status of the Baltic Exchange indices is an important foundation of the market. However, there are alternatives to the Baltic Exchange’s LNG assessments including a data driven technology led approach by Spark Commodities. The market will inevitably coalesce around a single benchmark and Simpson Spence Young’s job as broker is to help clients find the most popular solution.
“Ideally, we’d like to see the LNG FFA market progress to an exchange-traded contract,” says Duncan Dunn. “Simpson Spence Young is here to help build the forward curve and has the expertise to take the market to the next level.”
The Global LNG Team
Head of LNG
LNG Commercial Analyst