Martin Ackermann, CEO of shipping company BW LPG, responds to questions from the OPIS Europe LPG team at a recent industry event. BW LPG is the world's leading owner and operator of LPG vessels.


OPIS: U.S. and Chinese negotiators seem to be on the brink of a trade war truce. What opportunities and risks do you see for BW LPG when the two reconcile?

Martin Ackermann: We have a strong heritage in China and we are based close to the demand centres with our global operations in Singapore. We would be very happy to pave the way for the relationship to get sorted and to play a vital role in creating this logistics chain between the U.S. and China to facilitate global trade.

The headwind that might come against that is the global macroeconomic picture where we're seeing some signs of dark clouds gathering, and maybe we will see a slowdown in GDP which will, of course, impact chemical demand.

The one thing that is really fortunate as far as LPG is concerned is that it has multi-pronged demand. It is phenomenal what is happening in India with LPG's use as a cooking fuel. A wave of chemical investments over the next few years with infrastructure is also being built out, in China as well. There are some big players in China who are looking at many of these projects. We'll be happy to work with anyone who has use of LPG in China.

OPIS: Do you see an increase in U.S. LPG uptake in India?

Martin Ackermann: I think India is going to increase their uptake of U.S. volumes. They have already started a little bit, and Modi was in Houston recently. It's happening as we speak. We will see cargoes going in there. Right
now from a pricing point of view, it seems to be making a lot of sense. The spread between Contract Price (Saudi Arabia) and Mont Belvieu (U.S. Gulf Coast) is quite strong.

OPIS: Right now, what is the biggest hurdle facing the VLGC industry?

Martin Ackermann: The trade war is one, which is an issue. Short-term, it's all actually quite simple. China was importing nearly 4million tonnes in 2017 from the U.S. and when the tariffs were imposed in 2018 it basically dropped to zero. The Chinese are now buying from everywhere else. The volumes are being re-routed to South Korea, Japan. We've seen the long-term investments, especially in China, the larger Propane Dehydrogenation (PDH) projects, being delayed. Trade war is never good for long-term investments. So we hope they'll solve that in the foreseeable future.

OPIS: What risks and opportunities do you see for BW LPG from the escalating tensions in the Middle East?

Martin Ackermann: Naturally the risk has increased. We had the tensions growing over the summer with the Iranians capturing a ship and attacking two others. Of course that heightened our response to going in and out of the region dramatically. We've been cooperating with all the international military forces down there, especially the U.K., on getting transits in and out of the region. So it never really affected our operations.

The attack on the Saudi facilities with drones had us very worried. What we've seen is that the freight rate has strengthened for our segment and we are optimistic that Saudi volumes can be replaced by the increases we're seeing from the U.S. It so happens that the Enterprise terminal is expanding right now and we should see increased volumes by nine to 10 additional VLGC cargoes on a monthly basis which should cover this.

Of course, the longer distance we have from the U.S. into India and into southern China and Indonesia bodes well for the ton mile effect.

OPIS: BW LPG started cargo trading activities this year. Does BW LPG expect to increase spot trading volumes over time or is the goal occasional trades to boost your vessel utilization rate?

Martin Ackermann: It was intended to create a de-risking element for ourselves in order to improve utilization of our fleet. That is mostly successful when the markets are a bit more challenging, when there are lower freight rates and less demand, or maybe periods where capacity shifts and is too much for the market. We see that in cyclical markets or maybe even in seasonal periods. That gives us an opportunity to use the ships ourselves.

The Product Services Division is part of BW LPG's ambition to propose a low-risk and fully integrated product delivery service to customers. It is a defensive strategy to move our ships where there is no immediate demand. We try ourselves to fill up the ships and offer that to the end-user.

So far, because the markets have been quite strong, we've only done four in total at this point.

OPIS: Does BW LPG plan to diversify its revenue portfolio into related business segments?

Martin Ackermann: We aspire to become a global leader in LPG. But we will only grow if it creates value for our shareholders. Being part of the larger BW Group gives us the ability to see a lot of opportunities across LPG. That's a
fortunate position to be in. We will be as disciplined as we have been in the past and slightly conservative in our allocation of capital.

OPIS: How enthusiastic is BW LPG in converting its VLGC fleet to run LPG as bunker fuel?

Martin Ackermann: We have done a lot of work in this space. In August 2018, we inked contracts for the delivery and retrofitting of four LPG-propelled dual-fuel engines in our fleet, making us the global pioneer in LPG propulsion.
These first dual-fuel ships will be operational by May 2020 and will burn compliant fuel along with LPG.

It makes a lot of sense, first of all from an environmental point of view. It just seems like a very strong solution for reducing all greenhouse gases, not just sulfur, which is the IMO's current concern.

OPIS: Would you consider fitting scrubbers to meet IMO 2020 regulations?

Martin Ackermann: Exhaust-cleaning systems require investing millions of dollars in a method that allows you to circumvent taking your sulfur through the funnel. Instead, they convert it into either a liquid or a solid base that
you discharge from the ship. And, in that process you increase your energy consumption on board the ship by 2%-5%. So you spend more fuel in running this massive equipment that is made of hundreds of tons of steel.

I am not ignorant of the fact that there may be short-term economic gains in using heavy fuel oil. We are not a shipping company that aspires to, in a way, circumvent the rules so we can continue to use the old fuel. We plan to have six vessels fitted with scrubbers by early 2020, though our strategy is to use compliant fuel for our owned and operated fleet of 49 vessels.

The fundamental problem is that we shouldn't be using that dirty fuel on board our ships. It should be cleaned at the refineries on land installations where you can scale it up into massive structures and clean it efficiently. If you
have the choice between a clean, efficient, powerful solution that takes care of particulate matters, CO2 reductions and removes sulfur compared to having an exhaust-cleaning system on board your ship, the choice is clear.

OPIS: What is your outlook for VLGC freight rates?

Martin Ackermann: We're positive on freight for the next 18 months. That's what we said in our second-quarter report and that remains our view. We will hope that not too many people order ships, that's always the thing that ruins the party for everyone. There doesn't seem to be too much of that right now.

U.S. LPG exports is a fundamental driver of freight, and you have expansions at Targa, you have expansions on the East Coast, and smaller expansions on the West Coast and of course the big expansions at Enterprise. Then there are a number of smaller terminal expansions as well that no one speaks of.

OPIS: In view of the larger volumes coming from the USGC and long-haul voyages, would you consider a move to larger capacity VLGCs, such as the few 100,000-cbm ships that were seen 20 years ago?

Martin Ackermann: Currently VLGCs are 83,000-84,000 cbm and we're getting close to 100 million tonnes carried on a global basis, more than 70% of that is being carried by VLGCs. The world fleet is very young, given the extraordinary growth we've seen in U.S. volumes. Nearly 50% of the fleet is less than five years old. So there is no need to increase volume size to a large scale. And two other things probably deter the market from increasing sizes.

One is that the notional cargo size everyone is using to buy is 44,000 tonnes. So even if you have a bigger ship, it's difficult to sell larger. Even with our 84,000 cbm we can increase a little bit more than the 5%, but very rarely we
get to do that because that's the trading spec.

The other argument is restrictions, the biggest one being U.S. ports where there is an LOA, length overall, restriction. You can't actually increase the length of the ships alone. You can probably still add some cubic meters, but I don't think we're seeing a lot of that right now.

--Cuckoo James, cjames@opisnet.com

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