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Viewpoint: Asia LPG market eyes butane volatility

27 Dec 2017 07:14 GMT
Viewpoint: Asia LPG market eyes butane volatility

Singapore, 27 December (Argus) — The Asia-Pacific butane market underwent a sharp and largely unexpected reversal in 2017, as strong demand from major regional economies underpinned prices early in the year, only for signs of slowing consumption to erode gains in the fourth quarter.

Butane prices rose to a three-year high in March on the back of strong stockpiling interest from India. State-owned Saudi Aramco set its butane contract price (CP) at a $120/t premium to propane in March amid strong demand from butane-focused buyers in east Asia, coupled with limited availability from Mideast Gulf producers because of crude production cuts under the Opec-led output reduction deal.

The ascent in butane prices started as early as the fourth quarter of 2016, confounding seasonal patterns. Propane tends to be stronger than butane in the winter thanks to strong propane use in northeast Asia. But the butane CP's premium to propane rose from $5/t in August last year to $60/t in January, before peaking at $120/t by March. The sharp increase sent Chinese buyers scrambling to secure supplies for the lunar new year holidays.

Strong demand growth in the key markets of China and India had kept the butane CP above its propane equivalent since April 2015, as government policies in India in particular drove the adoption of cleaner fuels.

India, China drive growth

India's LPG demand has risen year-on-year for 51 consecutive months through November, driven by the government's push to increase consumption in rural areas. Delhi in May 2016 launched a programme to establish 50mn new LPG connections within three years, resulting in an increase in LPG imports to meet the higher demand. Consumption reached a record 2.06mn t in August. Imports rose to 1.25mn t in November, while production totalled 1.1mn t in the month, according to the latest preliminary data from the oil ministry.

But rising demand has come in tandem with an increase in prices. Delhi raised prices of non-subsidised LPG by 14.3pc for November, as global crude values strengthened and the government started cutting subsidies. Prices of subsidised LPG increased by about 0.9pc in November. The government then effectively froze prices in December ahead of key state elections.

The price increase dampened demand from new users of LPG, largely the rural poor and beneficiaries of the state-sponsored subsidy scheme. As many as 35pc of the new connections are dormant and have never been refilled, a supplier says, with a rebound in demand dependent on an increase in income levels.

The slowdown in imports to butane-centric India was foretold by the erosion in butane's premium to the propane CP from $20/t in September to a discount of $20/t by December.

Chinese demand has also been strong. Imports increased by 16.3pc from a year earlier to 15.28mn t in January-October 2017. Butane imports totalled 4.1mn t, up 12.6pc, while propane imports rose by 18pc to 11.1mn t. Butane imports were driven by refinery demand to feed alkylation and isomerisation units, which produce blending components that help enhance gasoline quality. Price-sensitive Chinese buyers were more flexible in adjusting their propane-butane import ratio and quick to react to fluctuating prices, given their lower term commitments.

Seasonal weakness weighs

Traders with butane-heavy supplies to sell on a fob basis from the Mideast Gulf struggled to offload their cargoes in the fourth quarter of 2017 as demand shrank. The problems were further compounded by the relatively expensive fob supplies priced off the CP. The sharp correction in cfr premiums encouraged butane buyers to consider cargoes of US and African origin offered on a delivered basis, rather than take a fob Mideast Gulf cargo.

An open arbitrage to ship US cargoes to Asia has increased butane inflows since November. The January propane-butane CP swaps differential was last discussed at $15/t, down from $25/t previously, as the peak winter demand season in northeast Asia maintained pressure on butane values.

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