Global LPG Conversations: How is China’s LPG demand in 2024?

Esther: So very good afternoon to everyone listening in to this podcast. My name is Esther Phua and I am the head of LPG for Asia Pacific. And I have today with me my colleague Celia Chen. She is the lead analyst for LPG in China and we're very happy to have her here today to give us a little bit of insight into China LPG. Hi, Celia.

Celia: Hi, Esther. Hi, everyone.

Esther: Okay. Well, just some questions really, you know, given that China is such a big thing, right, in Asia LPG and first and foremost, obviously, everyone wants to know about the import appetite into China. And since we're almost halfway into the year, I was hoping, are you able to provide us with maybe some China total LPG imports last year and what kind of total imports we're expecting by the end of this year, and where this new increase in volume is coming from or expected to come from?

Celia: Yeah. Last year, China, the imports reached 32 million tonnes and it's really had a great increase. The increase rate on a year is around 20%. It's really a huge increase. And by the shipping recording data we have checked from the analytical company Vortexa, it showed in the first five months, China has imported 13.4 million tonnes LPG in total and it has enjoyed a 12% annual increase already. And if we suppose this around 10% growth sustained till the end of this year, so Chinese total LPG import could be more than 35 million tonnes. That's really a great increase as well. And talk about the source, import sources, actually, talk about last year first, it's this close to 5, 6 million increase is mainly from the U.S. and Iran. So I think this year, it's maybe the similar thing we can expect. We already know, last year U.S. LPG export increased 15%, and for Iran, the increase is close to 30%. That's all very big.

Esther: Right. Okay. So just to be clear for our audience, you're saying that the additional increase in China LPG imports last year, the increase, the incremental volumes came from the U.S. and Iran, but China did maintain the imports that they imported from Middle East, right, from the year before?

Celia: Yeah, yeah, yeah, from the Middle East. It's the total import ratio from the Middle East, including Iran and non-Iran, still accounts for around 50% of the total import.

Esther: Okay. That's good, that's good. Okay, thanks a lot for that, Celia. Just moving on, since we're talking about all this import and all this demand into China, maybe we can dive a bit deeper into where this demand and imports going into. So obviously it's going into the PDH in China and maybe some of the crackers and it's been so widely explored, this whole topic about the poor PDH margin in China. And for reasons maybe very unique to China, it feels like we no longer worry about PDH closure or cancellation of projects, right? And in fact, we're expecting even more PDH capacity to come up this year. So do you agree with me so far?

Celia: Yeah, I agree. Yeah, the capacity expansion is still there, so we still expected more capacity, close to 5 million to come this year and maybe another 3 to 4 million maybe come next year, but still depends on how many additional propane is available.

Esther: Okay. So if we have so much additional capacity coming up, how about actual throughput and run rates at these plants because we've been hearing and reading about pretty low run rates at the China PDH, at least for the first quarter of this year, it was about 65%. So can we or should we be expecting high capacity but low throughput? Or do we expect high capacity and higher throughput by the end of this year?

Celia: Yeah. Actually, I think it could be higher capacity, lower run rates, but still higher total production. Yeah, because we can observe from the Chinese propane import this year, still mainly driven by propane. That means we still can expect a higher PDH production because by end of this month, I think, Chinese PDH capacity totally will be 21 million tons per year. So even its total average operation rate around 65%, but compared to last year, because of the total capacity is increasing, even it's lowered to 60%, the total production is still much higher because the capacity increase rate last year or this year, it will be over 20%. That's [crosstalk 00:06:26.664] growth.

Esther: So it does feel, I mean for outsider, for someone outside of China, it does feel as if, okay, there is this big pie, this big cake, or this big thing in China and everyone is building new plants and everyone's hoping to get a part of it, a percentage of it, but that the overall total demand that the country that China can take is this number and in order to accommodate a lot of players, the throughput at each of these plants may have to go down. The question then is what about the profitability at each of these plants, if that is what is going to happen? Do you think at 60%, is it profitable for PDH plants?

Celia: I think on average, or most of them will keep losing money because of the overcapacity. Because of the downstream growth for PDH plants, I think mainly have two drivers for the growth. One is the total downstream propelling demand could increase, but given the slower economic growth in China, so this is much slower than the capacity expansion speed. And another demand-driven factor is to replace refinery-sourced propane. Because propane price is really very competitive compared to naphtha. So that will make the growth continues. But it's also really hard to make money in the short term, especially the growth supply we expected. The next round of propane global supply increase will be from maybe the end of 2025 and 2026.

Esther: So since you mentioned steam crackers and cracker capacity, I wanted to ask what about all the additional steam cracker capacity that we are expecting to come out this year and next year? And I know it's hard to say exactly because how much LPG they take really depends on how much competitive LPG is compared with naphtha, which is what the crackers were built for, correct? But I still want to ask, for the sake of our audience, how much LPG do you think these steam crackers can take? Right? Assuming LPG is very competitive, what is the volume of LPG that these crackers that were originally built for naphtha can then switch to take LPG instead and give us some boost in the LPG market?

Celia: Before we look at the future trend, we can look at the current situation first. I think because from July of this year, we already see LPG price at, I think, at least $90 or even $100 discount against naphtha. Given such a big price difference, most of the flexible crackers, they already switched to fit LPG. In this case, we already estimate the Chinese demand, the crackers demand for LPG, imported LPG, not include the demand for integrated refinery-supplied LPG, the imported part, it's maybe 900 to 1000 Pt per month. Such a big volume. And also within this close to 1 million per month import demand from crackers, half of them is the base load. Because in China, some newly built crackers, they are designed totally to fit in LPG. And for those with flexibility to switch between LPG and naphtha, this part may be another half.

Esther: Wow. Okay. So you're saying that based on where the future market is showing now for July, based on the fact that LPG is $90 below naphtha, given that is our assumption scenario, we can already expect a million tons of LPG being imported for crackers with half the million used for base load and the other half is just basically flexibility to take in additional LPG because they are cheap, right?

Celia: Yeah, that's right. This is the current demand. And talk about the future because we already observed some newly built projects like the ExxonMobil one in Huizhou, Guangdong province, and another BASF one also in Guangdong, and also others, new projects. All these new projects, they have very higher flexibility to switch between LPG and naphtha. So we can expect the demand will grow and sometimes maybe even faster than PDH because we already saw a trend, another wave of cracker startup between 2025 to 2027.

Esther: Yes, yes. Well, all that's good news, right? It's all good news for LPG. So, okay, let's move a little bit to supply flows. And I'm just thinking, we're talking about all these increases in imports and demand into China for various purposes. Should we be expecting more supply to flow in from the U.S.? And how concerned are the Chinese? And I say concerned because if we're talking about additional flow in from the U.S., there's always that concern about price volatility, right, because of recent challenges around the Panama Canal.
I mean, it's not a concern just for the Chinese. It's a concern for everyone. But particularly if the increase in demand and imports, the growth is coming from China, we would expect additional volumes flowing from the U.S. to China. How concerned is this concern with these price swings, right, in the Panama Canal? Because of the Panama Canal, cargoes are coming in either more expensive or they're coming in later, right, because they're going via the Cape that takes 15 days more. Will the Chinese as a result look harder for Middle East supply?

Celia: Yeah. But because China and the LPG import growth is mainly driven by PDH capacity expansion, so the demand also driven by their demand for propane. And the US is the largest supply source. And according to our last year's total Chinese import, I think over around 44% LPG from the U.S. That means the dependence on U.S. supply is growing. So that makes it, many Chinese importers will concern more about the logistics, especially the Panama Canal. The import volume is huge. So if the delay or any logistic price, logistic cost increase, that will increase their import cost. So the impact becomes greater.

Esther: Well, I don't want to be sounding like the bearer of bad news, but I have to ask the question, right? Since we're talking about possibly more dependence on the U.S. for LPG supply, then what about the other concern from China with possible tariffs? That's probably been talked about. And we've seen tariffs being applied to certain products, right? Sold in the U.S. And we covered the markets and we've been hearing about tariff concerns and worries that might eventually be applied on U.S. LPG in the future. How is this sentiment on the ground when you talk to Chinese buyers? Do you get the feeling like they're very concerned that this might be a possible outcome, or not so much?

Celia: At this moment, not so much because, yeah, there's still some concerns about the trade conflicts. But currently, I think the global economy growth is slowing down. And from Chinese perspective, I think, the whole economy have a very stable growth rate is still very important to the authorities. So the possibility... I think, still most market participants in China still a bit optimistic at this moment.

Esther: Yes, let's hope it does not happen. I remember the market in a mess. You know, the last time we had a trade war, and there was a 25% tariff paid by the Chinese for U.S. LPG and it was a mess in terms of pricing. And I just don't think that we can afford that today, given all the challenges around the PDH sector. Plants are already not making money and any kind of additional tariff will just make things worse. Correct?

Celia: Yeah, that's right. And because there's LPG now, I think it's 14 million LPG comes from U.S. It's totally different from, you know, five or six years ago.

Esther: That's true. That's true. That's a very valid point. Okay, moving on, but still on a sensitive topic, I'm afraid. I like to ask about Iran. Yeah. So given that China is the largest market for Iranian LPG, right, do you want to tell us a little bit about the Iranian supply situation?

Celia: Yeah. You know, last year by those shipping record, we estimate Iran maybe exported 11 million LPG. And among this volume, 9 million came to China. So that's a very huge volume. And also enjoyed a very high growth. And we expect this growth will continue in coming two or three years. Because this growth is mainly driven by the new oil fields, output increase. So that will keep the trend. So, yeah, what we expected.

Esther: So, you know, we are expecting new gas fields, right, and new production, very significant ones coming from Saudi Arabia and Qatar in years 2025, 2026, with the peak production, maybe in 2029, 2030. Do you know anything about Iranian expansion in terms of production in the coming years, or should we expect, you know, the 11 million tons, which you mentioned as last year's exports to sort of stay around that same level?

Celia: As I know, the new gas fields in Iran, they have two phases. The phase one was launched the last year, and there's another phase two, maybe coming in, we expect it maybe 2027. So if this is the case, there may be another within this next stage, there's another big increase.

Esther: Yeah, yeah. Okay. So we can look forward to more supply in 2027 for Iran.

Celia: Yeah, but between the second phase come out, maybe flat. I'm not so sure. But from this year's observation, it's a little... The first quarter and the second quarter may be flat compared to the second half of last year.

Esther: Okay. And then we come to our favorite part of the podcast, and also the final part, which is about pricing. So I wanted to ask, because we understand that the Chinese use of Argus Far East Index have grown so much, you know, exponentially in the past few years. Do you have a rough idea at all? I mean, being close on the ground, right? What kind of percentage is the China import market based on AFEI and how much of it is based on CP? Any ideas?

Celia: Yeah. I think according to... We observed from the importers' pricing for the terms and spot cargo, we estimate maybe 70% are using AFEI and another 30% using CP.
Esther: Right, okay.

Celia: Yeah, yeah. This is also because of the demand is still driven by the PDH and propane import mostly from the U.S. So that's maybe one of the reasons for that.

Esther: I see. Well, I was looking at... I mean, what I was asking was about the physical usage, right? But we were looking at the swaps usage and we were happy to see there was a 57% increase of Argus Far East Index swaps transaction transacted last year. And so the figure that ended last year was 275 million tons of swaps traded on Argus Far East Index. Do you think this has got any...I mean, this big increase, right, 57% year on year, has it got anything to do with Dalian Commodities Exchange? I mean, were they actively trading spreads between forest index and maybe the domestic futures market?

Celia: Yeah. I think maybe two, three years ago when the LPG futures was just launched, we saw, you know, many domestic traders, especially the paper traders, working together with the industrial players, they will buy AFEI and sell Dalian LPG futures to...

Esther: Oh, I see.

Celia: Yeah, there's opportunities there. But in recent one or two years, we also observed a big increase of...because a big increase of the trading volume between AFEI and DCE's PP futures. That means they will buy propane and then sell PP. This spread.

Esther: Okay. That's really interesting.

Celia: Because in the past two years, I think, PDH keeps losing money. So if they can capture this opportunity, they can lock in this spread to hedge some cost risks.

Esther: So in other words, Argus Forest Index is actually a useful and helpful tool for the Chinese, both in the chemical sector, as well as the downstream wholesale LPG sector. So both sectors are using Argus Far East Index and using it to hedge different products, right? I mean, one to hedge with Dalian LPG futures, one to hedge with Dalian PP futures. So that's really interesting and very dynamic, I mean, you know, to have a big expansion, right, like this across different products in a short span of a few years.

Celia: Yeah, that's right. Because, you know, PDH players, they realize it's harder to make profit from, you know, purely focused on production. So they need to try to find a tool to avoid the volatility of the price.

Esther: Right. Oh, well, that's good to know. That's good to know. And I think we've actually run out of time, Celia, but thank you so much. It's been really helpful and really interesting. And for the rest of you out there, I hope if you have enjoyed this podcast, and to please follow us in our future episodes as well. And just one last thing to mention. We have our Asia LPG Forum in September that's been finalized on the 10th of September in the afternoon at 2 p.m. in Singapore Raffles Hotel. So we do hope you will sign up and register to attend the event. And we do hope to see you in Singapore. Thank you very much for your time this afternoon. Till the next time. Bye.