Waterborne LPG markets could be in for a rough patch in Q3 17 following massive Chinese imports in May and June, which helped allay market fears that a structural shift was underway following two months of very weak demand. Chinese buyers likely overbought in May and June and imports are likely to slow in Q3 17 as the country digests the inflows. But unpacking some of the numbers coming out of China suggests that demand growth remains on a solid footing. So, due in part to strong seasonality in China, we expect Asian demand growth to accelerate to 9.4% y/y in Q4 17. As a result, winter fundamentals look attractive, and as stocks recover globally this quarter, dips in prices should offer attractive opportunities to position for a tighter Q4 17.
Since 2013, the development of China’s propane dehydrogenation plant (PDH) capacity has been the focus of LPG markets as each start-up delivered a chunky increase in demand for propane. This year, new mixed-feed dehydrogenation (MDH) plants and butane-fed alkylation and isomerisation units have stepped into the limelight as recent gasoline specification changes require higher-quality components. These new units should continue to drive higher butane imports, which jumped by 59% y/y to 0.56 Mt in May.
China’s residential/commercial market still accounts for roughly 60% of total LPG demand, however, having doubled over the past decade to approximately 30 Mtpy (0.95 mb/d) in 2017. As air quality concerns have climbed the political agenda, local governments in China built infrastructure to supply residential users with LPG hoping to transition to natural gas when sufficient supplies were secured. However, the government has struggled to source enough natural gas at competitive prices. Even as natural gas supplies arrive, LPG remains an important back-up fuel, with demand rising in the winter alongside heating requirements.
Because consumers and governments tend to pay whatever price necessary when it gets cold to avoid freezing, heating demand in China will support higher Asian LPG prices as well as large arbitrage inflows from the Middle East and the US later this year. Overall, after the new MDH and alkylation units start up and the one-off import demand subsides, we expect import growth to ease to 0.15-0.20 mb/d and demand growth to fall from May’s levels to around 0.20-0.25 mb/d in Q3 17 before picking up for restocking ahead of winter, when we expect demand growth to reach 0.30 mb/d.
Adding to the bearish sentiment East of Suez in Q3 17 will be a temporary slowdown in Indian demand growth amidst high reported stock levels, exacerbated by flooding due to heavy monsoon rains in June that has inhibited LPG distribution. Indian demand is also facing headwinds from low refilling rates by first-time customers taking advantage of the cylinder subsidy scheme, in part due to six successive retail price hikes. A weaker naphtha complex could also weigh on LPG prices in Q3 17 as the incentive to switch to LPG cracking is limited.
The outlook for US production growth in 2018 might get more complicated the longer crude prices hold below $50, but, over H2 17, US LPG supply growth should continue and help make up for weak production over most of H1 17. Overall, we do not expect stronger prices and curves until winter buying—particularly from Asia—picks up in earnest, likely at the start of Q4 17.