Europe: Mild winter shifts LNG trades

LNG markets continue to surprise. At the beginning of 2023, the big themes were that European imports would continue to drive seaborne ton-miles higher, supplemented by a resumption of imports into China as economic activity resumes.

In a mid-January webinar presentation by Kristen Holmquist, the lead data analyst at shipbroker and LNG consultancy Poten & Partners, these observations were buttressed by deep underlying analytics.

Any predictions of what might happen are highly nuanced, and subject to a variety of “what-if?” considerations. But Poten’s analytical team suggests that overall seaborne LNG tonnages might rise to around 415 million tons in 2023, up around 20 million tons from 2022.

A major contributor to this uptick will be the US, with the damaged Freeport LNG facility, in the US Gulf (capable of exporting 1.0 - 1.3 million tons/month), to come back online during Q12023, Poten expects. Others are more cautious; Rystad Energy said that a full ramp-up might not occur until mid-2023.

The big demand-side driver of all these numbers is Europe; in Holmquist’s words, “Europe is expected to be in good shape at the end of the winter.” So far, the 2022-23 Winter has been warmer than anticipated, leading to lower gas import demand.

However, pipeline imports from Russia have been down dramatically, with further decreases anticipated during 2023. A big part of the demand picture is driven by imports of LNG in advance of the Winter season.

Holmquist said that the storage buildup during 2022 “…was higher than we expected…” and she added that, so far during the warmer than normal winter months, the levels of gas in storage “…have come down by less than we expected.” The result is that storage is at historically high levels.

China’s economic activity is expected to rebound in 2023, and so the country is also expected to account for 6 million tons of additional demand in 2023 as compared to 2022, though it was noted that anticipated seaborn import levels are still 9.5 million tons below 2021’s 80 million tons.

What does all this mean for LNG shipping? Seaborne rate dynamics were not covered explicitly in the Poten webinar, but it’s possible to offer some demand-side observations on this question. Though much of the gas coming out of the US is sold under term contracts, US exports are often shipped on an “FOB” basis- meaning that purchasers can direct cargoes to either Europe or Asia.

One important feature of the markets has been the sharp drop in European prices as measured by the TTF indicator; after seeing elevated levels for much of 2022, they are now below the Asian JKM numeraire.  

So, at least for this increment of LNG shipping, with the US anticipated to export up to 90 million tons in 2023, we may see a ton-mile increase. With higher prices in Asia, more cargo flows to Asia might balance what may be a lower demand for cargoes bound for Europe with its reduced need to fill up storage in advance of the 2023-24 gas season”, which starts in October.

Anecdotally, analysts at Rystad said that US exports to Asia rose 38% in the first half of January, while gas shipments to Europe slid by 22% during the same time period. They add, “While we do not anticipate an immediate diversion of cargoes towards Asia, with the expected rebound of China gas demand during the year, Europe and Asia markets will undoubtedly see increased competition for available LNG supplies.”

Courtesy Seatrade Maritime News

 

German aluminium foundry struggling for survival

Gerd Roeders is reluctantly preparing for the temporary shutdown of his German aluminium foundry to survive Europe's growing gas crunch. He hopes by moving the 200-year-old plant to three weeks of 24-hour shifts followed by a one-week shutdown, he can maintain output while cutting his gas consumption.

His bill has already more than doubled this year from last, he said, fearing it will triple or even quadruple in 2023.

The plan will save the cost of gas needed to fire up the ovens every morning, Roeders calculates, even if it means paying staff at family-owned G.A. Roeders more to work night shifts.

Survival for G.A. Roeders GmbH and Germany's 600 other foundries, most of which are small-to-medium enterprises with less than 250 staff, will mean cost cuts and tough talks with customers.

"We're laying out our prices to customers and telling them they have to pay more," 59-year-old Roeders told Reuters as workers prepared the plant for the first week of rest. "We can't deliver parts if we invest and don't earn anything back."

G.A. Roeders, with plants in Germany and the Czech Republic employing around 500 people, produces more than1,000 parts. It serves auto makers like Volkswagen and Continental, airline manufacturers and medical technology firms, yielding annual revenues of 60 million euros.

While contracts for foundries generally include a clause that allows them to charge more when the cost of metal increases no such clause exists for energy.

Roeders said he has always sought to be frugal on energy - the business' second-largest expenditure after staff - a habit he learnt from his father who would turn off office computers at night and switch off the lights during lunch breaks. But the firm is now facing unprecedented rises.

The price of the front-month Dutch TTF gas contract, the benchmark for Europe, has almost tripled since the start of the year due to the slowdown of Russian gas deliveries through Nord Stream 1 and a tight global market.

And while the firm still has a 30,000-litre oil tank on site, which has not been used for years, to use it again would feel like a backward step, Roeders said.

Germany's energy regulator is pleading for businesses, government and consumers to reduce their gas intake and has asked the biggest firms to submit emergency plans to cut usage further in the winter.

Yet chief executives of German carmakers including Mercedes-Benz and Volkswagen have warned in recent weeks that maintaining output levels under emergency plans will only work if their suppliers can continue to deliver parts.

Producers of the aluminium, steel and glass essential to making cars rely even more heavily on natural gas than the automakers themselves, prompting fears of a ripple effect across their global client base if they are forced to halt production.

German manufacturers of car components sell to more than 3,000 direct customers in the United States, Europe and Japan with their products reaching over 100,000 second-tier customers, supply chain analytics firm Interos estimates.

The energy crisis is the latest in a string of upheavals, from carbon emissions curbs and supply chain bottlenecks to stricter due diligence laws, which small businesses say they will struggle to overcome without more support.

"Converting to electricity-driven units requires massive renovation and is at best conceivable in the medium term," a spokesperson for the German Association of Foundries said.

"No technology other than firing up machines with gas is currently available," the spokesperson added.

Together with an alliance of other aluminium makers and a university, G.A. Roeders has received government funding to design a prototype smelting oven which could operate on a mix of 30%-40% hydrogen and 60%-70% gas. The aim is to eventually run exclusively on hydrogen.

Interest in the project has multiplied since Russia's invasion of Ukraine, Roeders said, but there are still many hurdles before it can become operational - from scaling up the technology to setting up a hydrogen charging network.

"To industrialize something like this usually takes at least five years," he said. "We'll have to dress up warm; we won't have a hydrogen oven yet."