Collateral damage

Published at 09:44 6 Apr 2018 by

The emerging trade war between the US and China has the potential to shatter the spring reverie. China is threatening to impose an additional 25% import duty on US-origin propane and polyethylene, among other products, in a retort to the Trump administration’s decision to impose heavy duties on $50 billion worth of Chinese goods. We do not think US LPG prices will have to immediately weaken if China goes ahead with the tariffs, as there are alternative markets open in the short run, but as output grows, the loss of China will be felt.

China cannot easily forgo LPG imports either, so prices will need to reshuffle to keep the barrels flowing. Seasonal demand patterns and rising Middle Eastern supply will cushion the blow for a while and give time for a negotiated solution to perhaps alleviate the worst possible outcomes.

For now, both sides have been content to just fire warning shots. The Trump administration will solicit public comment on its proposals and may still modify or even drop the measures. This means that the Chinese tariffs would not take effect until late May at the earliest, and only if the US imposes duties, but crucially this does not leave much time for Chinese importers to get US propane cargoes loaded and shipped across the Pacific before the potential deadline.

It takes more than four weeks to sail from the USGC to China so the window is very narrow already. Indeed, Asian markets are already full of talk of Chinese buyers trying to swap US-origin cargoes for Middle Eastern supplies. Even if the US and hence China back down, Asian consumers may choose to restock pre-emptively to insulate themselves from any fall-out.

The US supplied nearly a fifth of China’s 18.3 Mt of LPG imports in 2017, and other big North Asian buyers are hardly able to take all this volume. The US is already the biggest supplier to South Korea and Japan, stocks in both countries are high, and the recent relaxation of stock cover requirements in Japan will limit upside to imports. Mexico, another key customer, also already relies heavily on the US for imports and its slow-growing domestic market is unlikely to come to the rescue for US exporters.

More US propane may therefore have to find a home in Europe. Europe’s ability to absorb US barrels is likely to be boosted by disruptions to supplies from the US East Coast over April and May due to the closure of the Mariner East pipeline last month after sink holes appeared around the line. There has been no word on a likely re-start date and speculation is growing in the market that it could last well into May.

All the same, lower demand for US propane would encourage more cargo cancellations and stockbuilds in the US this summer, especially as supplies are growing elsewhere. Europe should soften any blow to Mont Belvieu propane prices, as European LPG markets are already looking tighter this spring than earlier in the year due to seasonal refinery maintenance, but ultimately the US will need to work into new markets in Asia, such as Indonesia and India. At current prices, US LPG can be competitively sold into Indonesia, so prices do not need to come off dramatically from current levels, but nor would the US emerge unscathed if a trade war materialises.

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