Viewpoint: Uncertainty boosts Asia spot LPG activity

Short-term tightness in the Asia-Pacific LPG market could give way to ample availability in 2020, as US exports rise further. But stronger demand from regional propane dehydrogenation (PDH) units may absorb some of the new supplies.

Tightening Mideast Gulf supplies have underpinned prices in recent months. Attacks on two key Saudi Arabian oil facilities on 14 September sent Argus Far East Index (AFEI) prices higher by 16pc on the first trading day after the incident, as market participants braced for potential supply shortages in Asia.

Prices continued to strengthen towards the end of the year on mounting anxiety about delivery delays because of fog at US export terminals and heavy traffic in the Panama Canal. Spot AFEI prices have risen by 36pc since 20 November.

The Middle East supply tightness left some Asia-Pacific buyers facing delays and cancellations to their January loading cargoes from state-owned Saudi Aramco. This came after Aramco announced voluntary cuts of 400,000 b/d to its crude oil production, adding to a 500,000 b/d output cut agreed by Opec in December in an attempt to support prices.

The supply factors are underpinning a bullish outlook for the Asian market over the next two months. But despite tight prompt availability, buyers may have access to ample LPG supply in 2020 thanks to US export terminal expansions and a substantial increase in the country's natural gas liquids (NGL) productions.

Trade tensions

Any increase in US exports may have less direct impact on buyers in China than elsewhere in Asia. Chinese importers have steered clear of US-origin cargoes, and instead paid a premium for cargoes sourced from elsewhere, because of the 25pc import tariffs on US LPG imposed under the US-China trade war. The premium of the Argus East China Index to the AFEI for propane rose as high as $60/t in September before narrowing to around $20/t towards the end of the year.

The trade dispute looks likely to continue to affect LPG markets in 2020, despite signs of progress towards a "phase one" deal. Chinese buyers might remain hesitant to purchase US-origin cargoes, even if tariffs are lifted, because of an increase in freight costs resulting from the International Maritime Organization (IMO) 2020 rules limiting sulphur content in marine fuel.

Other regional buyers, including northeast Asian importers and Indonesia's state-owned Pertamina, have reacted to the increase in US spot availability by cutting term supply purchases for the next year. And petrochemical producers Taiwan's Formosa Plastics and Thailand's SCG Chemical have issued spot tenders for January delivery propane cargoes, as high naphtha prices prompt them to switch feedstock. Rising LPG supplies may widen the price gap between LPG and naphtha and lead to even more spot buying interest from the producers.

Demand strength

The increase in supplies could be balanced by rising consumption over the next year. Demand in Asia is likely to remain strong, notably from China, the region's largest importer. Four new PDH plants are scheduled to come on line in China in 2020, while an expansion of the Ulsan PDH unit in South Korea will further boost demand.

And in a sign of China's increasing market role, several of the country's LPG buyers teamed up in November to form an ethane and propane purchasing group, which is designed to increase bargaining power.

By Alva Shi