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Although LPG (Liquefied Petroleum Gas) has a very prominent
position in Latin America, owing to its daily use among households,
it accounts for a relatively small portion of the global LPG
market, representing 27 million metric tons per year (9% of global
demand) out of a total market of over 300 million metric tons.
Unlike in other large developed markets, Latin America's demand is
driven by residential and commercial customers, which consume about
80% of the region's LPG. By comparison, global residential and
commercial demand accounts for 50% of global LPG demand, while
chemical accounts for 24%. This relative split is similar in China,
where residential and commercial represents 49% of the market, and
chemicals are 30%. In the United States, residential and commercial
is an even smaller portion of the market, at 29% of total demand.
This is a sharp contrast from Latin America: in Brazil, for
example, residential and commercial consumption accounts for almost
90% of the market.
Figure 1
America is self-sufficient on butane, but short on propane. The
residential and commercial sector consumes almost 75% of the
region's total propane demand, and the LPG sold in the region is
mostly a propane-heavy mix. As a result, the region as a whole is
susceptible to global propane market movements.
To put this situation into perspective, the average propane
dehydrogenation (PDH) plant in China uses an average of 0.8 million
metric tons per year of propane, while the largest cracker uses
about 2.2 million metric tons per year. Peru, Argentina, Chile, and
Venezuela use an average of 1 million metric tons per year of
propane (see Figure 2). The importance of residential and
commercial demand in Latin America has therefore given LPG a much
larger role in consumer finances, and thus, in political
discourse—much larger than in most global markets.
Figure 2
The important role of petrochemicals in the LPG market (and
propane, more specifically) has a ripple effect on global supply
and demand. As discussed above, petrochemical plants consume large
amounts of LPG, so when new plants come online, or existing ones
increase their use of LPG as a feedstock, global demand rises
significantly (see Figure 3). In other words, chemical demand rises
in "chunks" and can impact global pricing for LPG that could be
destined for residential and commercial use. The impact of
petrochemical consumption in China on global propane and butane
markets—and its spectacular growth over the past five
years—is critical to understanding Latin America's position as
a price--taker (see Figure 4). With all Latin American countries
using Mont Belvieu as a reference price, the correlation of local
prices with the global trend is undeniable.
Figure 3
Mont Belvieu (in the US Gulf Coast) is the hub for NGLs in the
United States, since most of the midstream infrastructure is in
that area, including export terminals. Additionally, for the past
15 years, the United States has been the main exporter of LPG to
Latin America and the world. As a result, Mont Belvieu serves as
the benchmark price for Latin America. Supply and demand dynamics
in global LPG markets that affect Mont Belvieu prices will have a
direct effect on delivered prices in Latin America. Delivered
prices are the starting point for the LPG pricing that residential,
commercial, industrial, and chemical consumers end up paying. These
are composed of the Mont Belvieu price, freight charges, and
terminal fees. Delivered prices in Latin America have increased
along with Mont Belvieu prices over the past few months, consistent
with our short-term forecast.
Recent global LPG price volatility
LPG prices are primarily tied to crude oil prices. With the
recent upheaval in energy markets, global pricing has experienced
volatility, reflecting a combination of factors, such as reduced
supply in the United States and other parts of the world, weak
demand that increased faster than supply growth (largely owing to
cracker demand), and low inventories (see Figure 4). In the United
States, more specifically, upstream producers have been exercising
capital discipline to meet the demands of the investor community.
This means that money that would otherwise be reinvested in the
business (i.e., by drilling more wells and increasing production),
is instead being used to provide investor returns. Consequently,
demand has gone up, but supply has not, leading to higher oil
prices (and therefore higher propane and butane prices). Other
compounding factors have also been at play, specifically within the
LPG market. Propane production has remained flat, while demand is
growing for both domestic US consumption and international exports.
China, for example, is expected to require an additional 4-5
million metric tons of propane, mostly sourced from the United
States. This is slightly more than Brazil's propane consumption in
2020 (3.7 million metric tons). These supply and demand issues have
led to lower inventory levels (well below the five-year average),
putting further upward pressure on prices. Propane prices dropped
from a seasonal high in first quarter 2021, but low inventory and
strong exports will support higher prices through the summer. Price
volatility and higher prices are expected through the rest of 2020,
as markets will grapple with inventory build and exports to Asia.
We expect Asian demand for propane to remain strong, particularly
from China. Butane has experienced a similar rally. Normal butane
prices dropped with a decrease in blending demand in the first
quarter of 2021. However, blending demand is expected to increase
early next year, supporting higher butane prices.
Figure 4
Impact on the Latin American LPG market
As a result, owing to the supply and demand dynamics highlighted
above, during the past few months delivered prices for propane and
butane have increased in every country in Latin America along with
Mont Belvieu (see Figure 5). Because propane and butane are
increasingly global commodities, pricing fluctuations resonate
across the world, and Latin America is no exception. Compounding
the issue, some Latin American countries have experienced an
additional increase (or decrease) in prices owing to currency
exchange rates. A stronger Chilean peso, for example, has helped
reduce the impact of global propane price increases, increasing
border prices by 50% relative to 149% increases in Mont Belvieu. On
the other hand, countries like Brazil and Argentina, where the
national currency has weakened against the US dollar, have seen a
higher increase in LPG prices (72% and 77%, respectively). Prices
are expected to decrease by less than 5% over the next year, but
they will settle higher than the average for 2019 and 2020. Since
most of the region—and most of the distributors—sources LPG
from the United States, the effects of global pricing increases and
decreases will similarly affect all countries and sectors. It
certainly does not help that the average Latin American household's
utility costs (LPG in this case) increase significantly in the
middle of a pandemic and of broad economic challenges. A comparison
of Mont Belvieu propane prices shows the close relationship with
inflation rates in key Latin American markets.
Figure 5
For a variety of reasons, public perception is often
disconnected from the realities of the market. As LPG prices have
increased in Latin America, so has the speculation around potential
irregularities or structural problems with the LPG market. Chile,
Brazil, and Colombia, for example, are all discussing potential
investigations of collusion and regulatory actions that are meant
to address these issues. In the case of Chile, the National
Congress ordered an investigation on possible collusion between the
three main LPG distributors that might have caused the increase in
prices. In Brazil and Colombia, regulators are mulling price
regulation or stabilization. In Mexico, a senator has proposed for
the regulatory body to establish a maximum price for LPG.
IHS Markit perspective on the likelihood of government
intervention and implications for Latin American LPG
pricing
The threat of intervention on the LPG market by political actors
in the region is quite real. Regulatory involvement in the shape of
a cap on retail prices, a stabilization fund, and tweaks to the
price-setting formula are all possible. In a region in severe need
of further infrastructure, any modification to the actual price of
what is a world commodity will deter further investment in
logistics and infrastructure and could lower the overall quality of
service. Most importantly, price interventions have been tried
before with less- than- stellar results. To name a few, Peru
recently abandoned its stabilization fund owing to negative effects
on public finances, Ecuador continues with a heavily subsidized
price that costs the government billions of US dollars a year, and
Argentina's LPG distributors demand a raise in the country's fixed
price because the margins currently do not allow for appropriate
distribution, let alone investment.
The pandemic escalated the visibility of LPG pricing for many
governments in Latin America. The recent high prices are tempting
politicians to intervene. It is important that market fundamentals
remain and that any proposed regulations enacted align available
supplies with demand sinks in Latin America economically,
commercially, and operationally.
Gain greater insight into global and regional ethane and NGL
markets with IHS Markit Midstream Oil and NGLs research. Learn more here.
Posted 19 July 2021 by Adrian Calcaneo, Executive Director, Latin America & the Caribbean lead, Midstream Oil & NGL, S&P Global Commodity Insights and
Fernando Covas, Executive Director, Midstream Oil and NGLs Advisory Services, S&P Global Commodity Insights
In two separate reports, Climate Bond Initiative and International Energy Agency both conclude Southeast Asian coun… https://t.co/U3NTnx0gdS
May 19
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