China's wholesale market will remain under pressure as domestic supply rises, gasoline demand falls and petrochemical overcapacity pressures PDH run rates
LPG wholesalers in China are faced with squeezed margins this year owing to new LPG-fed petrochemical projects, which are likely to have excess feedstock supply to sell on the domestic market given overcapacity and poor downstream demand.
The rapid expansion of propane dehydrogenation (PDH) and steam cracker capacity in China is resulting in more petrochemical plants entering the domestic LPG market as wholesalers to offload surplus supplies — especially when PDH and cracking margins are depressed, as they have been for the past two years. China had 32 LPG import terminals capable of receiving VLGCs at the end of 2022, of which 14 were used by wholesalers and 18 by petrochemical producers. Of these 18, eight were integrated terminals also serving the wholesale market.
A further seven new VLGC-capable terminals for the petrochemical sector opened last year, five of which could serve the wholesale market. This coincided with PDH margins staying in negative territory for most of the year, allowing many PDH operators to sell their LPG to the wholesale market.
Profit margins on the Chinese wholesale market were also under great pressure in 2023 despite rising demand, including from petrochemical buyers without access to an import terminal. In east China, the premium of the ex-terminal Ningbo wholesale price to the propane Argus Ningbo Index for large cargo deliveries narrowed by 48pc to $22.60/t in 2023 compared with a year earlier. The 14 traditional LPG wholesalers imported 9.9mn t of LPG in 2023, up by 14pc from 2022.
China's wholesalers serve all fuel-use sectors as well as petrochemical producers and gasoline blenders. Sales to the residential, commercial and industrial sectors have been contracting in recent years owing to the roll-out of natural gas grids, while demand from petrochemical buyers has been growing rapidly. This includes two new 1mn t/yr crackers, Sanjian Petrochemical's Zhejiang and Luqing Petrochemical's Shandong, which can consume up to 2,000 t/d each and must source their LPG by truck. Sales to gasoline blenders have also risen on growing MTBE exports. But etherified butane demand has fallen because of a consumption tax on iso-octane imposed in June 2023, according to a major refinery in east China.
Increasing refinery supplies of LPG is further squeezing wholesale margins. China's LPG output, entirely from refineries, rose by 5.8pc on the year to 47.3mn t in January-November 2023. Poor ethylene cracking margins forced some integrated refineries to lower their run rates and sell LPG into the domestic market, while weak demand for etherified butane also forced refineries to channel more of the product for use as a fuel, another east Chinese refiner says. Refinery-produced LPG is mostly unsuitable for use as a petrochemical feedstock as it is sold as a mix. The depreciation of the yuan has also weighed on wholesale import terminals. The yuan averaged 7.05 to the US dollar in 2023, down from 6.73 in 2022.
Selling pressure
China's wholesale market is expected to remain under pressure this year. Major refineries face lower gasoline demand as electric vehicle sales grow, making them more likely to ramp up output of LPG, while petrochemical overcapacity will continue to pressure PDH and cracker run rates, leading to more feedstock sales.
Another three new sellers will also enter the market in 2024. The 400,000 b/d Yulong refinery in Yantai, Shandong, is due to start up in the first quarter, but its two 1.4mn t/yr crackers are scheduled to launch in the second quarter, meaning it will have plenty of LPG feedstock to sell. State-controlled PetroChina Qingdao's 100,000m³ (59,000t) LPG storage facilityat Qingdao Dongjiakou port will open in the second half of 2024, which will sell trucked LPG to petrochemical buyers in Shandong. And a new VLGC-capable terminal in Huizhou, Guangdong, is due to be ready by the fourth quarter.
