Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
US-China trade dispute – implications for the global natural gas liquids market
16 April 2019
The US-China trade dispute is complicating economic and
political relations. The tariff coverage and levels continue
evolving and are still subject to negotiations and
uncertainties.
As announced in April 2018, IHS Markit expected that the global
liquefied petroleum gas (LPG) market to be efficient and fluid
enough to ease the situation. LPG has become a true fungible
commodity, with about one-third of global production (95 million
metric tons in 2018) being traded in dedicated tankers. Plus, so
many traders in the marketplace can optimize cargo movements. The
market has evolved largely as we expected.
US-to-China direct LPG exports began dwindling right after the
tariff announcement. By August, when the tariff was implemented,
the US-to-China LPG shipments were reduced to zero. At the same
time, the rest of Northeast Asia (including South Korea, Japan, and
Taiwan) picked up additional US volumes. Indonesia, not a regular
importer of US LPG, began taking in an average of three very large
gas carrier (VLGC) cargoes per month.
The trade pattern shift wasn't without a cost, however. Chinese
LPG import prices were historically at parity with the broader Far
East Index. Often, imports could be purchased at a $2 to $3 per ton
discount, reflecting the shorter transportation distance from
Middle East to China, especially South China. However, since April
2018, Chinese LPG prices have developed a cargo swap premium over
the Far East Index (see Figure 1).
The East China premium rose as high as about $30/ton in late
January, but it is still much lower than a full 25% tariff would
imply. The premium itself varies, reflecting changing market
sentiment. When Chinese demand is high or the overall market is
tight, a bidding process typically increases the price premium.
Winter residential and commercial demand also has supported an
elevated premium this year.
The US is the most important market for driving global LPG
incremental supply. With its market size, demand variety, and
growth potential, China is the most important market for driving
demand growth. The US and Chinese LPG markets not only offset each
other in volumetric growth, but also largely mirror each other in
LPG composition. US LPG is rich in propane, resulting in much
higher propane content in exports. Chinese demand is mostly driven
by propane-oriented chemical uses, including propane cracking and
propane dehydrogenation (PDH) development. With these
characteristics, tariff development is critical, as it will
continue to affect global LPG trade flow and prices.
What should we expect in the global LPG market if the
tariff remains?
US natural gas liquids (NGL) production is driven by strong gas
production growth, mainly from the Permian Basin associated gas and
in the Appalachia region non-associated gas. In the next few years,
we expect continued US gas production growth as additional
infrastructure alleviates take-away constraints. As a result, US
LPG production and exports are also expected to increase. At the
same time, after relatively muted demand growth in 2018, China is
expecting another wave of PDH development. IHS Markit anticipates
another 12 PDH projects will be added in China over the next five
years, with a total propylene capacity of 5.3 million tons per
year, implying an additional 6.5 million tons of propane
demand.
So far, a head-to-head tariff conflict has been avoided via
cargo swaps and trade rearrangements within Asia. As China's LPG
demand and US export grow, China will continue to rely on swappable
markets to avoid a direct tariff impact. Our question: Is there a
point when the market runs out swap volumes in Asia? If so, what
happens next?
Figure 2 compares several current and potential swappable
markets. We included markets with significant size that are
currently importing US LPG or might do so. The key metrics to
consider are import characteristics, including volume, sources, and
propane versus butane composition. Proximity to the Chinese market
plays an important role, as long-dis-tance volume swaps increase
freight cost.
The first, most natural swappable market is Northeast Asia -
specifically Korea, Japan, and Taiwan (JKT) - due to its proximity
to China. In 2018, JKT imported 19.2 million tons of LPG, including
68% from the US, a 10% increase over 2017. In 2017, about
one-quarter of China's LPG imports were from the US. That
percentage dropped to just 6% in 2018 and stands at zero since
August 2018. As Northeast Asia is near capacity for additional
swappable volumes, additional Asian markets will likely be
involved. For example, Indonesia imported about 5.5 million tons of
LPG in 2018, including about 30% from the US, compared with only
12% in 2017.
As Asia runs out of swappable volumes, the next potential
markets could include India or Europe. Both markets offer the depth
- and thus flexibility - for trade rearrangements. India is
currently importing about 12 million tons of LPG each year. Even
though it has not imported any LPG from the US due to its close
proximity to the Middle East, India has been increasing propane
share in its overall LPG imports, presenting itself as a strong
candidate for propane cargo swaps. In 2018, propane accounted for
about 50% of total LPG imports. In Europe, imports are
traditionally propane-biased, and currently a quarter of these
imports are from the US. If these markets are called upon to
participate in the cargo swaps to avoid tariffs, however, logistics
costs would rise, escalating swap premiums.
However, not all potentially swappable volumes will be
exchanged. For example, the existing contract structure will
constrain the flexibility of cargo movements. Additionally, import
structure - such as a propane versus butane split - can also
complicate cargo rearrangement. A VLGC typically carries four LPG
tanks, which each store either propane or butane. An all-propane
VLGC cargo can be relatively easily swapped with another
all-propane cargo, but it would take multiple mixed VLGCs to
accomplish the same goal. VLGCs might need to make multiple port
stops, further increasing logistics challenges and swap premiums.
And if Chinese importers continue to pay higher premiums, certain
demand will likely be reduced, potentially weakening global LPG
prices.
What will be the impact on ethane?
Ethane is not yet on the tariff list, and there is no current
ethane trade between US and China. Ethane would experience a more
direct impact from tariffs because it is single-sourced from the US
and there is no alternative market to help work around the tariff
issue. This is one of the major concerns of Chinese companies that
are interested in importing US ethane.
***
United States Natural Gas Liquids Markets Weekly
Report
• Assess US NGL markets short-term outlook to inform trading
decisions
• Understand US NGL markets medium to long-term outlooks and trends
for big picture
• Evaluate market factors such as supply sources, end uses &
waterborne freight
• Use current U.S. weather trends to anticipate and plan for
potential risks
• Fill gaps in historical lagging EIA data with credible current
projections