China continues to diversify away from US LPG
The recently concluded deal between China’s Wanhua Chemicals and Qatar Petroleum for LPG supply indicates the continued push by China to diversify away from US LPG in light of the US-China trade tensions.
China’s LPG demand is projected to increase at a CAGR of 3.6% from 2019 to 2024 driven principally by the expansion in its domestic petchem sector. The country has eight PDH plants in operation that consume 5.5 mtpa of LPG which in addition to the three new PDH plants expected to come online in 2020 will increase China’s LPG demand by 2.8 mtpa. LPG imports in the country took a hit after the onset of the US-China trade war when China imposed retaliatory tariffs of 25% on US LPG. As a result, US-China LPG trade slumped from 1.6 million tonnes in 2018 to negligible figures in 2019.
To fill in the gap, China increased its LPG imports from other regions such as the Middle East, Africa, Canada, Malaysia and Australia. China has also been importing LPG cargoes from Iran despite the US sanctions on the latter. However, LPG trade between Iran and China will decline in 4Q19 due to increased maritime surveillance, US sanctions on Chinese vessels trading with Iran and maintenance at Iranian refineries. In September 2019, China also bought propane cargoes from the North Sea region triggered by the price arbitrage between Asia and Europe.
With the increase in propane tariff from 10% to 25% in August 2018, Chinese players started swapping their US LPG supplies with non-US LPG at a higher premium of $5-10 per tonne. In 2019, the premiums increased steadily to reach $30-40 per tonne in 3Q19, resulting in a two-tier market in Asia. The higher premiums have also compelled other Asian countries to increase their imports of the cheaper US LPG.
China is developing closer ties with Middle Eastern countries in order to secure long-term LPG supplies, enabling it to further diversify from US LPG. China’s WanhuaChemical recently announced the signing of a 10-year contract with Qatar Petroleum for the supply of 0.8 mtpa LPG starting in 2020. The company had also signed a 10-year FOC contract with UAE’s ADNOC to supply of 1.0 mtpa of LPG to China from 2019. Apart from the above supply deals, China’s Wanhua Chemicals is reportedly in talks with Saudi Aramco, Kuwait Petroleum Corporation and ADNOC to increase its LPG liftings for 2020.
In August 2019, SP Chemicals started operations at its 0.65 mtpa steam cracker plant, marking the start of China’s first ethylene production facility. The cracker will use ethane as the feedstock, which will be sourced from the US. Earlier this year, Zhejiang Satellite Petrochemical started Phase II of the 0.45 mtpa PDH plant which can process up to0.54 mtpa of propane at full capacity. Fujian Meide Petrochemical, which is expected to start operations at its 0.66 mtpa PDH plant in 1H20, will have the capability of processing 0.79 mtpa of propane at full capacity. Dongguan Juzhengyuan Technology’s 0.60 mtpa PDH plant is also scheduled to start operations by 1Q20. The plant can process up to0.72 mtpa of propane as feedstock at full capacity.
Wanhua plans to start commercial production of its LPG steam cracker in Yantai. With ethylene production capacity of 1.0 mtpa in 2H20, the cracker will be the world’s first to use 100% LPG as feedstock. The company also operates a PDH facility with 0.75 mtpa capacity and a PO-MTBE facility at Yantai. The operational PDH facility consumes0.90 mtpa of propane while the PO-MTBE unit consumes 0.70 mtpa of butane.
The increase in long-term supply contracts between China and the Middle East are also raising vessel demand with Wanhua Chemical looking to procure 5-6 VLGCs. We believe three VLGCs, recently ordered by Tianjian Southwest Maritime, will be on long-term charters with Wanhua Chemical for transporting LPG from the Middle East to China.
We expect that the increase in LPG trade between the Middle Eastern countries and China along with the possibility of further OPEC production cuts and higher premiums on Middle Eastern LPG supplies will compel other Asian countries – Japan, South Korea and India – to increase their LPG imports from the US and Australia, which will improve the tonne-mile demand in the future.