Why are LNG shipping stocks retreating after a brief surge?

With the softening of peak LNG winter demand in Asia, we believe the spotlight is back on supply and demand fundamentals of LNG shipping. LNG spot prices have nosedived after surging in December and early January as winter demand is receding. LNG spot shipping freight rates had surged since November 2020 on account of the cold snap in Asia, congestion at the Panama Canal and shortage of vessels in the spot market. Increased LNG spot buying by Japan, China and South Korea, following severe winter, had led to higher demand for LNG vessels. We aim to explore the impact of the recent decline in LNG shipping rates on LNG shipping stocks and their prospects for the remainder of the year.

Declining LNG spread pulls down spot LNG shipping rates and stock prices

We believe the recent decline in spot shipping rates is mainly driven by a fall in the spread between LNG prices in Asia and Henry Hub. The arbitrage between Asian LNG prices and Henry Hub has declined to USD 6 per MMbtu as of 21 January compared with USD 11.90 per MMbtu at the start of the year. Asian LNG prices have fallen as heating demand which peaked early this month is reducing. Temperatures in China and Japan are expected to rise in coming months, which should result in lower spot cargo purchases by Asian LNG importing countries. Apart from softening winter demand, easing of congestion at the Panama Canal has also led to lower spot shipping rates which resulted in the Baltic LNG index declining 16.4% in the last one month.

DMFR LNG shipping index declined 13.2% since mid-January with the fall in spot shipping rates. The Baltic LNG shipping index also fell 39.4% during the same period. We believe the relatively lower decline in DMFR LNG shipping index compared with the Baltic LNG index is due to the long-term view taken by equity investors. Previously, LNG shipping stocks reacted positively to the surge in shipping rates as the companies with spot fleet stand to benefit. DMFR LNG shipping index increased 24.8% in the last three months compared with a 35.7% increase in the Baltic LNG index.