MGCs retain their status as ‘true workhorses’ due to high yields and increased orders

July 8, 2024

Following the surge in VLAC ordering during 2023-24, the trend seems to be shifting to the relatively small MGCs, as 20 orders were placed in 1H24. With the rising interest of shipowners, we believe 2024 will be a historic high for MGC orders. As per Drewry’s financial analysis, MGCs offer a high ROI compared to VLGCs in the current market situation, considering the same utilisation levels and growth rates.

The current LPG fleet has 137 MGCs, which comprise 8% of the total fleet in numbers and 11% of capacity. Apart from playing an essential part in LPG trade on key routes, MGCs are in demand for seaborne ammonia trade. Although several VLGCs in the fleet can transport ammonia, MGCs have been the preferred choice due to the usual parcel sizes and marine infrastructure available.

New MGC orders have been on an uptrend since 2023, owing to the demand for dual-fuel vessels, future green ammonia trade and high congestion at the Panama Canal. In 1H24, 20 MGCs were ordered, nearing the full-year 2023 tally of 26 orders, and we expect more than 40 orders in 2H24.

Figure 1: LPG vessel new orders showcase an upward trend for MGCs, as orders for VLGC and VLACs fall

Source: Drewry Maritime Research, Clarkson WFR

Demand for MGCs will expand due to the increasing congestion at the Panama Canal as container and LNG traffic will increase on the route. The passage, a key transit point connecting the Atlantic with the Pacific, is projected to experience high congestion, especially in the peak months, owing to increased container and LNG transits. Consequently, VLGCs will face stiff competition in securing a transit slot, boosting demand for smaller MGCs that can transit through the older Panamax locks at the canal.

Figure 2: MGCs transits through the Panama Canal rise

Source: Drewry AIS

Furthermore, MGCs will be the first segment to transport green ammonia volumes, as most planned projects may not be operational when VLACs (Very large ammonia carriers) start getting delivered. In other words, there will be insufficient green ammonia volumes that VLACs can transport.

The surge in VLAC orders – 21 in 2023 and 26 in 1H24, with the majority delivering in 2027-28- adds to vessel oversupply fears in the LPG shipping sector as they would initially be in LPG trade instead of ammonia. These oversupply concerns and higher newbuild prices have started dissuading some owners, and they have switched to MGCs or MACs (Medium ammonia carriers).

Newbuild prices of VLGCs and MGCs increased about 21% and 14%, respectively, in 2Q24. This rise in asset prices can be attributed to strong freight rates in 2023, which incentivised shipowners to place more orders for these vessels.

Figure 3: Profit % vs Utilisation for VLGC and MGC

Note: This valuation of vessels employed the Discounted Cash Flow (DCF) methodology. We adopted a Weighted Average Cost of Capital (WACC) of 7.0%. The ‘profit percentage’ signifies the potential upside for the owner who acquires vessels at their current market prices.

The current newbuild prices for VLGC and MGC vessels are $119.5 million and $76 million, respectively. According to Drewry Maritime Financial Research, profitability analysis of shipowners in the current market suggests that acquiring an MGC offers a higher potential ROI than VLGC. This could indicate either an overvaluation of VLGC newbuild prices or an undervaluation of MGC newbuild prices, which should theoretically reflect their superior earning potential. This holds true if utilisation for both vessel segments is the same, but if utilisation for MGCs goes below 85% and VLGCs remains above 95%, then it is more profitable to buy VLGCs.

Source: Drewry Maritime Research, Drewry Maritime Financial Research