Global LPG Conversations: Update on Asia-Pacific markets and Indonesia’s LPG plans

Author Argus

In this latest episode, Asia-Pacific LPG editor Reza Amanat talks with David Appleton about the lack of reaction in Asia-Pacific prices to several logistical issues impacting the market in the past quarter.

They also discuss Indonesia’s long-term plans for LPG in the residential sector.

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David: Hello, everybody, and welcome to our next episode of Global LPG Conversations in which we explore developments around the LPG markets globally and in various regions. My name is David Appleton. I'm the Business Development Executive at Argus in Singapore, and today, I'm joined for the second time with our Asia Editor, Reza Amanat. How're you doing, Reza?

Reza: Hi, David. Good. Thanks for the opportunity to talk again.

David: Excellent. And we spoke originally on one of the first episodes of this podcast series in January, and the discussion, as I remember then, was really around quite a significant rise in prices at the time. At the beginning of the year, I think we saw the Far East Index, or the Argus Far East Index, got to around almost $700 per ton. So we've just started the second quarter here, and I thought it'd be a good time to check in with you about what's been going on the market. In particular, we've had a lot of things happen not just in LPG markets, but in terms of oil markets, and global logistics in general. If we think back to February, we had the big freeze out of Houston, where we lost about a week's worth of exports from the US Gulf Coast. That's around a million tons. We then had fog out of Houston, as well. And of course, we had this issue with the Suez Canal, which, although not necessarily as crucial to the Global LPG system, is certainly part of that. And so, logic would say that when these sort of things happen, you'd expect to see higher prices again. Is that what's been going on? And how's the market reacted to these disruptions?

Reza: Yeah, that's right. So, the interesting thing about the follow-on from the rise in price in January is that we've actually, despite all those factors that you mentioned, and I would add to that the ongoing issues in the Panama Canal, where we're still seeing seven, eight days delays continue, all of these issues, which have created backlogs of cargoes being delayed would've usually, you know, caused a spike in price, one would have thought. But in fact, since January, our prices have been drifting lower, and I think the major reason for that is demand-side issues, frankly, in Asia, and you know, there has been a few flare-ups in COVID-19 outbreaks in places in China, which has forced some major provinces and cities to engage various levels of lockdown, and you know, which impacted the transportation sector and the ability to deliver LPG. We've also, frankly, seen not a great recovery in some sectors, such as the commercial and the residential sector in terms of demand ever since the COVID outbreak happened in some countries, such as Japan, South Korea. And as I said, because of these rolling, or flare-ups of COVID cases in China, you also had a recovery and then, you know, a loss in demand when lockdowns had to be put in place again. And then in addition to that, we had a period where Chinese PDH units, which have been basically supportive of demand in over this period where commercial and residential demand was hit, going into maintenance in February and March. So there was a heavy schedule of maintenance in February and March, and that also meant that petchems demand for propane in China wasn't as great as it was before. We're quite lucky to have gone through all these events, blockages, delays, and the freeze in Houston at a time where Asian demand wasn't spectacular. All these issues were absorbed by the market without too much fuss, as we can see from the prices.

David: Last week, we had Saudi CP at, I believe it was about $65 lower than March at $560 per ton. Was that when you think the market was expecting it or a bit lower? And again, is that connected to this softening demand?

Reza: I think the market was genuinely surprised when they saw the CP come out at the lower end of the recommendations. So, there was some space for Saudi to have settled higher within their recommendation range, but they decided to go for the lower side of the range. And I think that's got a lot to do with the fact that they can probably see demand in Asia being easily covered by what's available, despite some of the loading delays. Obviously, some buyers would have missed their laycans and they would have have had to swap cargoes. The reason this sense of, you know, really tight supply at the moment is because of what we spoke about earlier in terms of demand-side. And I think in addition to that, we have seen a steady volume of spot cargoes emerge from other Middle East Gulf producers, such as Kuwait, KPC, QP in Qatar. They've been sort of ad hoc-basis selling spot cargoes at the Middle East Gulf, which have been usually sold at a quite heavy discount to the CP. So, you know, the prices are, in themselves, telling us that we're not in a shortage situation and Aramco would have looked at the double digit discounts that these spot cargoes are getting, and decided that probably need to set the CP lower for April. They were also going to, you know, eventually come out of this cycle of cutting their crude production. The latest news is that Saudi Arabia and other producers are going to start to allow their production to come back up again. The Saudis probably knew this. There's going to be more availability coming from them, as well. So yeah, there's a sense of like, you know, the market was probably not able to handle higher prices at this rate.

David: Right. Okay, I understand. And then just moving to a slightly different topic, I know that you've written a very interesting article for Argus LPG World this month, which will be up for our readers on Tuesday about the bigger picture in Indonesia going forward, and some potential replacement of LPG with DME. Could you just tell our listeners a little bit about that story?

Reza: Yeah. So, this is a story that's been sort of talked about a lot of this coming out of government policy circles in Jakarta, who have been toying with this idea for a long time. But I think there's new proposals and more serious, serious proposals now about phasing out LPG imports over time. And perhaps, basically, not importing any more LPG by 2030. And of course, that's significant, because Indonesia is the biggest importer in Southeast Asia, one of the biggest in Asia itself. That would be critical for the market in terms of loss of demand if Indonesia were to do that .Of course, there's a timeline to this. It's not going to happen in the short term. As I said, they'll probably look into phase LPG imports out by 2030, and one of the ways in which they want to be able to achieve that is by basically developing the downstream coal industry. I mean, the coal industry for Indonesia's economy is hugely important. They are the world's largest thermal coal exporter, and I think they just want to get more value out of that industry and by developing a downstream coal gasification, downstream sector, they can, you know, benefit from getting more value out of the coal industry, and at the same time, cutting their import bill. While they're not having to import more LPG, which is quite costly for them. They have to set aside quite a chunky bit of subsidies every year for imports of LPG. And yeah, so dimethyl ether, or DME, from coal is one of the solutions that they seem to be opting for.

David: Okay, very interesting. So, a combination of them mainly being more independent in terms of their energy needs there. Although, obviously, there are a lot of people who would argue that in some ways, using coal for residential needs is environmentally maybe not a step in line with progress that we see in a lot of countries, but obviously, there are always competing priorities for governments around the world. In this case, if they have to call this some logic to be able to use it. So that's certainly something. So, you said is 2030 is the timeframe they're looking to sort of really ramp down the imports and bring it back down to pre-subsidy level.

Reza: Yeah. And I think, you know, the whole idea is still under review. I mean, the infrastructure that's currently in place for the distribution of LPG, some of that might be able to just be diverted to distributing DME, but for sure, there's going to be need for new infrastructure to do this, which isn't right now available. It also depends on the price of LPG going forward. If prices go lower, obviously, the incentive to make huge investments to switch over to a new product to replace propane or butane is not going to be as attractive. So there's still up in the air. It's just that, obviously, the Indonesian government right now is incentivizing the development of the coal downstream sector by giving royalty exemptions to certain coal gasification plants and projects and prioritizing them. So, it seems as though they are, you know, down that path. It's just that they're not that down the path long enough yet to know for sure if this is going to have a significant impact on their LPG imports in the long term.

David: Okay. Well, anyway, very interesting. Certainly something to watch considering they are, I believe, the fifth biggest importer in the world, and to say, the biggest in Southeast Asia. And I think very interestingly, they source from really a lot of different places now, both the Middle East, the US, and other locations so any change to to Indonesia will be quite important for the global market in general. So, brilliant. Well, thanks very much, Reza. And yeah, let's catch up again in a couple of months and see how things progress.

Reza: Sure. Thanks a lot.

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