The global LPG selloff that was widely expected for the spring got underway early last month. Demand fundamentals look mostly fine, especially with propane and butane falling in price to entice petrochemical producers to switch away from cracking naphtha, but the market looks set to struggle. Because of supply growth in the US and elsewhere, LPG prices need to remain relatively cheap to hold onto petchems market share. Strong supply growth means US stocks will be higher y/y later this quarter, even with high exports. Moreover, the US is not the only place where supply is growing. Output, and exports, have surged from numerous sources.
Demand in Asia should be strong, but infrastructure problems are cropping up again. Perversely, strong LPG prices in 2017 and a backwardated market structure have led to buyers being more selective around restocking, especially since long-haul supplies are now unlikely to arrive before the passing of peak winter demand. Asian buyers anticipated sharp falls in Middle Eastern contract prices from January’s lofty levels and held off from restocking for as long as possible. Sharply lower contract prices for February are incentivising some buying, but spot prices were already at a discount to the CP, so the effect may be limited in the short run.
India looks to be suffering from yet another round of over-exuberant buying. The end of the monsoons in Q4 17 coincided with record refinery runs and LPG output that overwhelmed demand despite solid fundamentals. Indian imports and refinery output exceeded domestic consumption by an average of 0.11 mb/d in Q4 17 and with limited storage capacity on hand, India has again been forced to resort to delaying the discharge of imports. Right now, eight heavily laden VLGCs are off the Indian coast having waited at least a fortnight to discharge; so Indian buying may be slow until Q2 18.
Weak naphtha is not helping. Arrivals of West of Suez naphtha in Asia are expected to reach 1.8 Mt or more in February, and this huge volume has weighed on prices amid the sporadic cracker outages and the recovery in Iranian naphtha exports. More Asian petrochemical plants have been switching from naphtha to LPG to take advantage of widening LPG discounts (butane in Japan fell to a more than $100 per tonne discount to naphtha in mid-January). But regardless of the weakness in naphtha, LPG has been leading the market lower.
From early January, propane cracking has become increasingly profitable compared to naphtha. Producing a tonne of ethylene using propane yielded a margin of $509 per tonne in early January, vs $468 per tonne for naphtha. Towards the end of the month, propane cracking was yielding $702 per tonne of ethylene produced on our model, compared with just $558 per tonne for naphtha.
The supply side for propane is bearish and becoming more so. US inventories will likely draw for another two months, and while US stocks could fall by more than 10 mb by the end of March, they will soon move into a y/y surplus, even with hefty exports. LPG is transitioning to a period of seasonally lower demand in the northern hemisphere with the approach of spring. In the summer, there are few catalysts for LPG demand as low prices can only stimulate so much demand in the short run.