“If you had to focus on only one thing in the LPG [liquefied petroleum gas] market, not just for this year but for the coming years, it would be the US inventory position,” emphasised IHS Markit senior director Scott Gray.
As the world’s single largest exporter of LPG, the United States “has become a focal point for much of the world”, he told IHS Markit. Of about 300 million tonnes of LPG produced around the world each year, about 90 million tonnes go into the seaborne trade and about a third of that is sourced from the United States. “But the rate of US exports exceeds the replenishment rate in North America, so folks around the world are scratching their heads and asking how much ‘is in the tank’ and whether the rate of US exports is sustainable,” he said.
As of late November 2017, the United States had 73.1 million barrels of LPG in inventory, down from 100.8 million barrels at the same time the year before. Over the winter of 2016–17, US inventories were drawn down by 64 million barrels through the end of March 2017. If the same winter drawdown pace is seen through the end of this March, “then something has got to give”, Gray cautioned.
LPG is a by-product of oil and gas production, and a certain minimum level of inventories is required to keep the pipeline and storage system running. If US inventories fall too low, prices will rise worldwide. Higher prices could lead to cargo contract cancellations, which will increase the number of ships available in the spot market, further dampening rates.
“The primary recipients of US LPG in Asia are Japan, South Korea, and China,” Gray explained, noting that US exports are propane-centric, with about half of US volumes going to Asia and a quarter each to Europe and Latin America. The other big LPG exporting source – the Middle East, which also accounts for about a third of seaborne volumes – has more butane in its cargo mix and a greater focus on markets in India, Thailand, and Southeast Asia.
Gray advised market participants to focus on the Chinese buyers’ response to pricing. “Demand in Japan and Korea is flat. It really boils down to China. Of the Chinese imports, half are residential and the rest are for propane dehydrogenation, or PDH,” he said. China has two types of PDH plants, which are used in plastics production. The first are standalone propane-in/propylene-out facilities; the second have more integrated downstream components. The response of the standalone facilities bears close watching, he said.
“The standalone PDH guys in China are at the front of the line of those who will shut their facilities if prices rise too much. If the US end-users feel that US inventories are insufficient and they bid the price up, the price will adjust accordingly in the Asian market, and at some point, those Chinese PDH guys will just say ‘uncle’ and turn it off,” he said.
US Gulf coast LPG contracts are take-or-pay, so if Chinese PDH plants are shut, the related shipper would opt to pay the cancellation fee and not take the cargo. These contracts generally are served by vessels on long-term charters. “They [vessel interests] will get paid no matter what, but if there are 10 cancellations, that means there are now 10 more ships available [in the spot market], and that doesn’t help freight rates,” Gray said.
Looking at the impact of PDH facilities across Asia, total propane-processing capacity in the entire region increased by 4.5 million tonnes in 2016 and by 2.3 million tonnes in 2017, mostly in China. Given that some of the planned additions for last year were delayed, it is estimated that an additional 4.5 million tonnes of propane-processing capacity is expected to be added this year, which should be a positive for cargo demand.
IHS Markit estimates that China’s LPG demand will increase to 52.1 million tonnes this year, up by 9% year on year (y/y). India is expected to post a 5% increase to 24 million tonnes and Japan is expected to see a 6% increase to 14.9 million tonnes. China receives about 30% of its LPG supplies via waterborne imports, India 20%, and Japan 14%.
Another key issue to watch in the United States–Asia LPG trade is the shipper’s choice of route – via the Panama Canal or Cape of Good Hope – which has a major impact on effective vessel supply. It takes about 40% fewer days for a very large gas carrier (VLGC) to get to Asia using the canal than if it sails around Africa. Assuming no delays, a VLGC sailing from Houston, Texas, to Chiba, Japan, at 15 kt would take 27 days via the Panama Canal and 47 days via the Cape of Good Hope.
Since the Panama Canal opened its expanded locks in June 2016, most VLGCs have switched to that route. According to data compiled by IHS Markit, 80% of United States–Asia LPG voyages have opted for the canal. Although there appeared to be a slight shift back to the Cape of Good Hope route in the second half of 2017, Gray said this was due to seasonal pricing strategies. “If you buy an August stem FOB [free on board] out of the US Gulf and take it via the Cape of Good Hope and go slow, the price should be higher when you get to the Far East in October. It’s a tactic,” he said.
In light of the unexpectedly high demand from LPG carriers for neo-Panamax transit slots, the Panama Canal Authority raised its tolls for 84,000 m3 VLGCs by 29% starting in October 2017. However, IHS Markit data confirm that the higher toll has not had a significant effect on LPG shippers’ demand for transits.
The shift in LPG voyages from the Cape of Good Hope to the Panama Canal is a negative for rates, because it creates more effective vessel supply by rendering shipping more time-efficient. In general, rates in the LPG sector have been weak, primarily as a result of new capacity injected into the market as newbuildings have been delivered. According to Clarksons, VLGC rates from the Middle East to Asia between January and early December 2017 averaged USD15,000/day, down 32% from the same period the year before.
Sentiment has improved this year due to expectations for lower capacity growth. According to JP Morgan analyst Noah Parquette, “LPG shipping is nearing the end of its hangover. We expect materially slower VLGC fleet growth to begin to tighten the market in 2018. Given how dynamic demand is, we see this sector as having the potential for high reward.”
IHS Markit estimates that LPG carrier capacity will increase by 4.1% in 2018 to 34.19 million m3, a dramatically slower growth pace versus last year’s estimated capacity increase of 10.7%. The problem is that newbuild deliveries are expected to pick up again in the future. As of late 2017, the newbuild additions for 2019–20 were daunting, indicating fleet growth rates of 6.9% and 7.7%, respectively.
Access the 2018 outlook page