Chinese LPG growth to continue despite headwinds

LPG demand will continue to grow, largely as a result of increased petrochemical and PDH capacity

China's LPG consumption will continue to expand this year despite a challenging environment for the petrochemical sector, as a result of further expansions in propane dehydrogenation (PDH) capacity and domestic supplies, and switching from LPG to coal or electricity in the residential sector.

China imported 18.8mn t of propane in January-November, up by 6.4pc from a year earlier, customs data show. This was largely attributable to the petrochemical sector as PDH output rose by 13pc in the same period, offsetting a drop in demand for LPG use as a fuel, Argus data show. Butane imports rose by 9pc to 5.4mn t, thanks to stronger MTBE exports for gasoline blending and substituting naphtha as an ethylene cracker feedstock, with energy use also declining.

Increasing petrochemical capacity in China is expected to continue driving domestic LPG demand growth. About 3.9mn t/yr of PDH capacity came on line last year, as well as three flexible ethylene crackers with propylene capacity of 1.9mn t/yr combined. A further 12 PDH plants are due to open in 2023, adding 8.1mn t/yr of capacity, as well as three more crackers of 1.4mn t/yr of propylene combined.

China imports most LPG for petrochemical use, but import demand growth from the sector is likely to remain above 10pc this year, offset declining purchases from other sectors. PDH utilisation fell to about 76pc in January-November, nine percentage points lower than a year earlier, and it could drop by a similar amount this year as producers grapple with negative margins.

Demand for LPG as a fuel in China has also been under pressure because of Covid-19 restrictions and cheaper coal and other fuel prices. But consumption fell last year by 10-20pc as industrial and commercial use waned, according to a south Chinese importer. Residential sector demand was also affected by electric cookers becoming cheaper than LPG, the importer says. Sales to bottling plants in east China slid by about a fifth in 2022, with sharp declines in the second quarter when Shanghai was in lockdown, an east Chinese refiner says.

LPG imports to south China's Guangdong province fell by 18pc in January-November because of switching to cheaper coal. Zhejiang Petroleum and Chemical sold 70,000-120,000 t/month of LPG from late May as it bought coal as a replacement for LPG for power generation. It is a trend that could continue in 2023.

China's refinery LPG production is due to grow again this year after the 320,000 b/d Lianyungang and 400,000 b/d Jieyang refineries opened in late 2022. More selling from the petrochemical sector should negative margins persist could weigh on refinery availability to avoid an oversupplied market.

Butane imports to China were supported by the country exporting 1.3mn t of MTBE in January-November compared with 23,000t in 2021. But this came largely as a result of weak domestic gasoline demand during the lockdowns and firm crude prices in nearby countries because of the conflict in Ukraine. It seems unlikely it will happen again in 2023 should gasoline use increase as expected.