Global LPG Conversations: LPG’s key role in petrochemicals

David: Hello, and welcome to the latest edition of "Chemical Conversations" and "Global LPG Conversations" brought to you from Argus Media. My name's David Appleton. I'm VP for LPG at Argus. This is actually my debut on the "Chemical Conversations" podcast, but those of you who listen to LPG will probably recognize my voice. But today I'm joined by Sarah Rae, our VP for Olefins and Derivatives. Hello, Sarah.

Sarah: Hi, David. Good to be here.

David: And I think it is your debut on "Global LPG Conversations," is that correct?

Sarah: It is. This is my first LPG event.

David: Excellent. Okay. So now the reason that we're doing this is because we do a lot of podcasts and webinars and all kinds of other things about both chemicals, petrochemicals on one side and then LPG on the other side. But sometimes I think it's useful for us to get together so that we can all kind of cover both angles for our various listeners and audiences. So that's the idea of today's podcast.

So I'll be asking Sarah some questions around the petrochemicals products markets, and I really hope that that's particularly interesting for those of us in the feedstock side and LPG who are really more focused on that, but obviously understand that there is this inherent connection between the two things. So let's just get going straight away. So, very basic question, as I just noted, petrochemicals products are very important to LPG demand. But can we start with just a few basics around this for those who aren't necessarily that familiar with petrochemicals?

Sarah: No, absolutely. And you're right, LPG has become a really big product and important driver for the petrochemical world and vice versa, obviously. And it's really grown significantly over the last 20 years. I mean, but basically there's two different drivers. The first one is probably the one which is maybe less well-known in a way, is the amount of LPG that actually goes on to the old, you know, traditional steam crackers and has replaced naphthalene in many places. And it's used significantly across Europe. But propane in particular is also used very significantly within Saudi Arabia. And that's one of those sort of hidden things that people don't realize. And in most cases, what it's doing is replacing naphtha. So the pricing of that propane or butane that's going onto the crackers is very much one that's price-driven, and it's the relative price between that LPG and the naphtha that matters. It's not the absolute price, it's how much lower it is than naphtha that brings it onto the crackers.

And then obviously on the other side, which is the one which maybe gets more publicity, is that huge investment in PDH, particularly in China. But there's PDHs all across the world. And the clue's in the name, these units are called propane dehydrogenated and they are about taking propane and making it into propylene. And there's no other co-products around it, no complications. It's just the economics of that propane to propylene, then onto the downstream products.

David: Brilliant. Great. In a minute I'm just going to ask you about the kind of latest market dynamics on the products. So before I do that, you've noted that there's been this big move over the last 20 years into to LPG. I'm assuming that's due to the fact that the petrochemicals players have been aware that there's just more of it available or coming to the market across that period with, you know, gas developments and shale and this kind of thing. I mean, is that basically correct about why we've seen so much investment in...

Sarah: Absolutely.

David: ...using LPG?

Sarah: And it's all about, you know, getting a cost advantage. So, you know, if you can take, you know, propane onto part of your cracker or a number of the furnaces and that makes your costs lower for periods of time, then it gives you, you know, a profit advantage over your competitors. So that's why there's been such a lot of investment around that. And it's less of an investment for, say, than going to ethane because, you know, ethane out of the U.S. is an alternative feedstock to make ethylene. The problem with ethane, you know, you're basically having to replace most of the furnaces, so that's a really big investment in terms of capital. Whereas if you go to propane, it's still an investment, but it's not as big. And with ethane all you get is ethylene. So if you want propylene or other sort of co-products, then LPG is a really nice cost advantage, but also gives you the products you want at the end of the day.

David: Right. Got it. All understood. Okay, so moving to the market now, and this is kind of a big question. So you've already spoken just now about ethylene and propylene, which are obviously somewhat different products, but in the same wider petrochemicals basket. But if we could just get a view on how those markets are doing, and then perhaps if we just start with China, just because...China propylene and derivatives because they are so important, particularly with the PDH as you mentioned.

Sarah: So, I mean, China's huge, isn't it? So the big issue in China has been, I suppose twofold really, is the amount of new capacity that has been invested in China, and at the same time the slowing of their economy. So demand has slowed at the same time as adding lots of capacity, which means the market has got long. And, you know, it's funny, China had this...there was a really big boost in terms of demand during COVID and post-COVID, you know, some people sat at home, they were spending money on goods, and deliveries, and all the sanitizer products, and all that packaging, that was all great for ethylene and propylene. And post-COVID, it really hasn't continued because, you know, post-COVID, what people wanted to do once they were let out was go and visit friends and, you know, have holidays and spend money in restaurants. So they weren't spending as much money on goods and solid things which drives petrochemical and propylene demand.

So there's been this drop off in terms of demand growth. And then I think the Chinese, you know, consumer has also got nervous with, you know, the cost of living crisis, which has some impact there, their slowing economy, and the real estate sector being poor. So, you know, the actual level of savings and the amount of money that's sitting around in bank accounts in China has grown. So again, that has slowed growth demand. So they've just not been growing as fast in capacity, been a bit faster rate.

David: So just to frame this correctly here, it's not that demand has shrunk as such, but it's just the growth in the capacity has been faster than the growth in the demand, which is at least somewhat still a COVID hangover, but now it's...

Sarah: Yeah, there's an element of that as well, you know? And, you know, these products are still growing, it's just they're growing at slower level. Capacity has been growing faster. And I think the plans in China in particular for rationalization of some of the older units has been difficult to implement because of the economic issues and because of unemployment. So I think the plan was originally to actually rationalize more of these older propylene units, which just hasn't happened.

David: And then just one more dynamic to this, on the LPG side, we have seen a really significant impact to either tariffs or at this point, I guess we are looking more at kind of the threat of the return of significant tariffs, particularly between the U.S. and China, but frankly also I guess in the region more broadly, places like Vietnam and elsewhere. Can you speak broadly to how that affects the product side?

Sarah: It's interesting, isn't it? So for propylene and for polypropylene, it's not such a big traded commodity as ethylene and polyethylene. And that's partly because there isn't really any massive cost advantages to where you make propylene and polypropylene. So it doesn't move around to the same extent. So the tariff story for propylene and polypropylene has not been a huge threat apart from on that LPG angle. So, you know, the big tariffs that were being suggested around propane were a massive threat to the PDHs in China while that was on the table.

David: I see. And because I think I've seen that one of your really good charts at one of our meetings or conferences where the growth in propylene capacity within China that's from PDH, I think is now something...it's up to about 35% to 40% of total, whereas if you went back a few years ago, it was less than 10% or something. So that will obviously have a big impact because of that.

Sarah: That's right. And then over time, and we are not quite there yet, but that's going to become the driver. So, so much of Chinese capacity will be associated with PDH that they'll need those tons and they'll have to run. So propane will become the price setter.

David: Understood. Very interesting. So obviously on the LPG side, we think of the impact on the propane, but not necessarily how the propane is impacting the polypropylene and so on. And then staying with China, but slightly different angle here, you did allude to a little bit around the investments in ethane or U.S.-based ethane as a more popular feedstock choice. And we are seeing some developments in this, but we are in this, kind of, flip-flopping U.S.-China trade relations, which, you know, I believe effectively 100% of the ethane comes from the U.S. So what do you think the impact will be in this in the long-term?

Sarah: That's true. So what was happening in China was an increasing number of companies were either, you know, building whole crackers built on ethane or converting a number of their furnaces. So part of the cracker to run on imported ethane. And you're right, all of it comes from the U.S. Well, obviously I think with the threat of tariffs and the fact it can only come at the moment from the U.S. is that I think it is making people think twice about some of those investments. And I think in some cases we've seen some investments canceled around that or maybe potentially moved to other countries, which would be interesting as well because I mean, an ethane investment is huge.

Ethane is one of the most difficult gases to move around. It's the top of the tree in terms of, you know, the rating of the vessel and the rating of the storage. So it is not an insignificant capital cost in terms of, you know, the jetty space, the infrastructure around it, the storage to bring ethane onto your cracker. So I think definitely we are seeing a slowing down of some of those investments and some people thinking again...you know, on the original list, I would say it was getting up to about maybe, in a couple years time, it would've been about...20% of total Chinese capacity would've been based on ethane. I'm not sure that's going to happen to the same degree.

David: And to be clear, that's ethylene capacity we're talking about in this case.

Sarah: Yeah. So I guess these are, kind of, real world and long-term impacts of the current situation with the trade policy and the related politics and then actually the kind of things that we don't hear about in the headlines so much, which is a shame in a way, isn't it, as these are really important impacts. Moving away from Asia-Pacific, we at Argus have been, both in the LPG side and then in our petrochemicals reports, reporting on developments in Europe that I think in a nutshell indicate that it's challenging times. We've seen either rationalizations or plans for asset sales from some market players. So if we agree that the outlook for olefins in Europe has seeing these challenges, can I start by just, what do you think the knock-on effect to LPG will be?

Sarah: I mean, it's been one announcement after another, hasn't it? And we know using 2020 as a base year, by the end of '27, Europe will have closed 8 crackers representing about 4 million tons of ethylene capacity. So very, very significant change in the European market. In global terms, this is relatively small. That's because in Europe the crackers are smaller and older. And the net effect will be lower because Europe's also building the INEOS Project ONE, which is a 1.4-million-ton ethane cracker. So the net effect is less. But from an LPG perspective, you know, most of the crackers that are being closed are the smaller, older naphtha-based crackers. So relatively it's not such a huge impact on the LPG market. There are some which had LPG flexibility. So, you know, the Wilton cracker in the UK, which originally had propane and butane on it, but that's been offline since 2019, so that will have no impact at all on the LPG market and the current market. And the other ones like the Italian crackers didn't have LPG. So, I think from an LPG perspective so far, we are not seeing a huge impact.

David: I understand. And just again, sticking with Europe, I'm really looking the longer-term here. We are in a situation now where there is something of a move towards carbon neutrality or decarbonization in the petrochemical sector across...this is obviously saying that it happens across commodities and segments more generally. And Argus already pricing, for example, biopropane in Northwest Europe. And when I look at that price, which we publish every day in Argus International LPG and Argus Biofuels, it's clearly somewhat problematic in terms of how expensive it is for both petrochemicals users and then also on the energy side. And so I'm wondering if you have any views on the expectation of the growth of biopropane or in fact bio-feedstocks more generally in the coming years and how that will take off going forward?

Sarah: It's interesting, isn't it? And I think you're right. I mean, you know, we use those same biopropane and bionaphtha prices that you guys publish and other parts of Argus publish to calculate a bioethylene and a biopropylene cost reference that we are going to start publishing soon in the new Argus Biochemicals report that's going to get launched. And I think that whole drive towards net zero and carbon neutrality is a very significant one for the petrochemical and very much actually what's driving some of these rationalizations, the investment needed for net zero on some of these older units is more than is affordable. So, you know, it's definitely a drive out there. On the broader scale though, I think at the moment the scale is still small. The consumer currently, in most cases, isn't on a mass basis willing to pay the cost of what these bioproducts cost. So, you know, most of the crackers have been through the process of trialing these products and making trial batches and having a certain amount in stock. But I think, you know, the sales levels are still very low.

David: Brilliant. Great. I think we'll wrap things up for today, but just before we go, I just want to note that EPCA is coming, European Petrochemical Association event. It's in Berlin, that's right, isn't it, Sarah?

Sarah: That's right.

David: I assume...

Sarah: September...

David: ...that you and a number of other of our colleagues from the Argus pet-chems teams will be there.

Sarah: We will be.

David: Excellent.

Sarah: We have a forum on the Monday afternoon before the actual EPCA starts September 22nd, which is a complementary event. If people come onto our website and they can register there, and then we'll be available for meetings through the week.

David: Fantastic. Good. So anyone listening who wants to get in touch or have any follow-up conversations with Sarah or indeed with other members of our petrochemicals team, then they'll be there. I will not be there, despite that it will be very interesting for me to join, because I'll in fact be at the...Well, I'll be at the Liquid Gas Week in Rio, in Brazil. Thank you very much, Sarah.

Sarah: Thank you, David. Great to talk.

David: Goodbye, everybody. We'll catch you at the next "Global LPG Conversations" or Argus "Chemical Conversations."