Higher feedstock propane prices, driven by escalating freight costs and growth in absolute demand from China, are set to quicken consolidation of the Chinese petrochemical industry.
Overcapacity of propylene in a weak global economic environment led Chinese propane dehydrogenation (PDH) plants, mostly in east China, to have unscheduled maintenance in the third and fourth quarters of 2023, cutting run rates to a 32-week low in early November 2023. This has weakened demand for propane, although absolute demand is still growing in line with rising PDH capacity in China, which Argus estimates will expand by 9mn-10mn t in the next two years.
China is the world's largest LPG importer. An estimated 15pc of China's PDH plants are standalone units without downstream processes. Facilities that cannot maintain plant operability because of higher feedstock propane costs — aggravated by elevated freight rates — and mitigate their exposure by diversifying downstream product yields could face prolonged shutdowns and eventual elimination.
Chinese PDH operators, the largest source of LPG demand in east China, grappled with protracted negative production margins for the most part of 2023. Production margins averaged -$98/t in 2023, according to Argus' calculations.
And Chinese buyers, which reduced LPG imports in November and turned re-sellers, continued to face elevated propane prices at the cusp of winter, mainly because of transit restrictions by the Panama Canal Authority (ACP). Delivered prices of propane to Japan on the ArgusFar East Index (AFEI) rose further in contrast to crude prices following the 30 October 2023 announcement by the ACP of reduced canal transit slots from November 2023 until February 2024.
Delivered prices of propane to Japan settled at $688.50/t on 23 November, up by $10/t from before the 30 October announcement, while the Ice front-month January Brent crude contract shed nearly 10pc over the same period. Prices have since eased because of weak demand, averaging $621.15/t in December, down from November's average of $697.50/t.
Another concern for the Chinese PDH sector is tightening supplies of US propane this winter after the ACP announced further cuts to daily transits. The US is a key LPG supplier to China.
Extra freight costs to carry US shipments to Asia-Pacific via the Suez Canal or Cape of Good Hope instead of the Panama Canal have pushed cfr quotes higher. More than half of Asian imports from the US are expected to move through the Suez Canal from January in line with the Panama Canal's phased transit reductions until February, increasing voyage times by two weeks. Longer voyages increase tonne-mile demand, keeping freight rates high despite weak demand from certain Chinese regions.
This, coupled with growth in absolute demand from China, makes it more likely that the capital-intensive Chinese petrochemical industry will not only expand but also consolidate capacity in the coming years. Environmental rules are also getting stricter in the country to meet net zero goals, adding to operating costs at a time when operating margins are being squeezed.
China's LPG imports totalled 30.77mn t for the whole of 2023, a 17pc increase from 26.34mn t in 2022, according to data from oil analytics firm Vortexa.
Consolidation inevitable
Elevated shipping costs are likely to continue since the Suez Canal is likely to become the main waterway for transporting US propane to China. As much as 70pc of US product-laden vessels could be diverted from the Panama route to avoid uncertainty in waiting times, traders and shipping sources estimate.
Over two-thirds of the 43 new very-large gas carriers (VLGCs) planned for 2023 are on the waters. Some vessels are delayed until 2024. But in the wake of the many ships expected to reroute from the Panama Canal, shipping sources expect an additional 15pc to the global fleet to keep freight at current rates, although this depends on the rate of fob loadings.
Shipments via the Panama Canal will supply markets in Japan and South Korea, which are nearer destinations, although rebounding demand from north China could increase competition for supplies because of its geographical proximity to the canal. Weather conditions impacting water supply to the Panama locks will dictate crossings, lending volatility to delivered Japan prices since buyers are likely to diversify sources for supply stability such as to China.
Operating cash margins at Chinese PDH plants only turned positive in the second quarter of 2023 after having been in negative territory from September 2021. But with PDH capacity in China projected to expand by 9mn-10mn t in the next two years, the vicious cycle of propane demand driving up prices — now aggravated by freight costs — will only quicken the consolidation of the Chinese petrochemical sector.
