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China LPG tariff could push US propane to Japan

04 Apr 2018 19:12 (+01:00 GMT)
China LPG tariff could push US propane to Japan

Houston, 4 April (Argus) — A proposed 25pc tariff on US propane exports into China would likely send more US LPG to Japan, based on 2017 trade flows.

Asia is the largest and fastest growing demand center for US feedstock, accounting for roughly 66pc of US propane exports in January. Over all of 2017 and into January 2018, China accounted for approximately 121,600 b/d out of an average of 903,000 b/d in US propane exports, according to the US Energy Information Administration.

An analysis of China delivered propane prices versus US propane with a 25pc tariff shows the tariff would have effectively shuttered the US arbitrage on paper throughout 2017. If the tariff goes forward, future US cargoes would likely be diverted to other large consumers in Asia, such as Japan, which accounted for on average 208,000 b/d of US exports last year. Korea, where new PDH units are bolstering feedstock demand, imported about 69,600 b/d on average from the US. Singapore, a gateway to Asia, reported roughly 54,000 b/d in propane imports from the US last year.

An influx of US propane into Japan could put bearish pressure on global propane prices as supplies lengthen in that country, where delivered cargoes are used to formulate the Argus Far East Index. US propane prices at Mont Belvieu, Texas, followed the FEI for much of this year, propping open the waterborne arbitrage in an oversupplied US market.

Some in the market suggest the tariffs could lower demand for US propane, widening the spread between Mont Belvieu and Saudi contract prices. Yet many expressed doubt the 25pc hike will actually come to fruition, calling Beijing's move "lots of hype."

Even in the event the tariff goes through, LPG trade would likely be diverted throughout Asia in order to meet Chinese demand. Cargoes fixed to Japan from the Mideast could be swapped for US cargoes, diverting propane from the Arab Gulf originally bound for Japan into China instead. In that scenario, global propane balances would be little changed.

Buyers in Latin America and Europe would also potentially benefit from shifting trade flows; Mexico and Brazil accounted for roughly 133,700 b/d and 54,000 b/d of US exports last year. The Netherlands, home to the largest European import terminals for LPG, accounted for 40,600 b/d of propane exports last year.

A potential tariff on US imports would also make Canadian exports more competitive; AltaGas is building a propane export terminal at Ridley Island in British Columbia with an eye to export propane into Asia. Propane in Edmonton, Alberta trades at a significant discount to Mont Belvieu.

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US-China propane arbritage with tariffs $/t