Chinese LPG buyers reduce US-origin propane imports on trade war concerns
Chinese buyers have reduced their imports of US propane since March in anticipation of increased tariffs and are diverting some term volumes to other buyers in Northeast Asia, US and Chinese market sources said.
The reduction has been particularly evident since April/May and intensified in June/July, they said recently.
“There is quite a small volume of US cargoes imported into China during that period,” one Chinese trader said. “Most of the cargoes are diverted to South Korea and Japan,” he said, adding that companies such as Oriental Energy — a big buyer of US propane via term contract to supply two PDH plants — as well as Wanhua Chemical — another PDH plant operator — had been showing their offers via brokerage Ginga physical trading window last week and via direct deals.
China was the third-largest importer of US propane in 2017, behind Japan and Mexico, according to the US Energy Information Administration.
While China has suspended publication of LPG import and export data since April, the latest EIA data showed US propane exports to China dipped to 2.078 million barrels in April, compared to 3.11 million barrels the previous month and 3.173 million barrels a year earlier.
S&P Global Platts Analytics expects May and June LPG exports to China — which could include butane — to total about 625,000-650,000 barrels, based on data from cFlow, S&P Global Platts’ tradeflow software.
According to shipping data from JLC, a China domestic information provider, one US VLGC arrived in China in March, one and a half US VLGCs in April, three in May, two in June and none so far in July. In comparison, China imported an average of around 280,000 mt/month of US propane in 2017, nearly seven VLGCs every month.
A VLGC is capable of transporting about 44,000 mt of propane.
US-CHINA TRADE WAR
Propane was among the list of US products that could face a 25% tariff in response to US taxes on Chinese goods, but was not part of the tariffs that went into effect July 6. Propane currently carries an import tariff of 1%.
“We need to see if the US escalates next,” a US shipbroker said.
Market sources have had mixed reactions to the possibility of increased tariffs on propane.
“I don’t really think it will be a problem,” a US trader said. “Ships will just get swapped around. US to Japan, Mid East to China.”
Others predict global propane prices could get a boost.
“Our take on it here is that it will cause a reshuffling of where US cargoes end up, but won’t impact overall US export volumes,” Platts Analytics’ analyst Carolyn Bergner said. “We think countries like South Korea, Japan, and Indonesia will increase their purchase of US barrels, while lowering Middle Eastern imports, and China will take up more Middle East LPG.”
Interest in US propane that may be resold by Chinese term contract holders is also being seen from Taiwan, which uses LPG as an alternate petrochemical feedstock, as well as for households, trade sources said.
However, VLGC freight rates from the US Gulf Coast to Asia, which had jumped almost 48% since mid-April and would make US cargoes costlier, is a concern, they added.
Despite market uncertainty regarding the potential for added tariffs, the US propane arbitrage window to Asia has been open since mid-June, Platts calculations show.
With FOB USGC propane cargoes, reflecting cargoes loading in H1 August, at $543.14/mt on Tuesday, a Houston-Chiba VLGC freight rate of $65/mt and CFR Japan propane cargoes for H1 September at $617.50/mt, the arbitrage looked to be open by about $9.40/mt. It was as wide as $18.12/mt on June 20, Platts data showed.
Increased propane production in the US has calmed fears of insufficient winter supply, in contrast to the summer of 2017, when US traders worried if inventories would last through the winter, resulting in stronger US prices and abundant cargo cancellations.