In this episode of Global LPG Conversations, James Gooder, VP for Africa, talks to David Appleton about his views on how LPG markets have evolved over the recent years and the challenges looking forward.
LPG demand in Africa has continued to grow each year as the fuel plays an increasingly important role in the cooking sector, not only in the more mature North African region but also across East, West and Southern Africa. Growth has been particularly strong in Nigeria, which is now consuming around 1 million tonnes per year, with government and industry plans to increase this figure substantially in the coming years. In East and southern Africa, new or potential upcoming storage and terminal projects are likely to push consumption up across the region well into the next decade.
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David: Welcome back to "Global LPG Conversations," our podcast series that covers developments and drivers in global LPG and NGL market. My name is David Appleton, and I'm joined by James Gooder, our VP for Africa across all products. And James has spent a lot of time talking to the African LPG sector, working out how LPG is and should be priced in Africa, in particular. And we can have a chat about some developments on that side. But before we get to the pricing, James, firstly, how are you doing?
James: Fine, good to be with you.
David: Excellent. And so before we get to the pricing, I just want to ask a more general question around your impressions of the opportunity for LPG market development in Africa, across the decade or so you've spent traveling around the region, and what you see also as the challenges there.
James: Well, that's a good a question. I mean, over that time, we've really seen the market develop a lot. I mean, when I started going down to Africa, as you say, about a decade ago, I mean, then as now, it's really a tale of two Africas, where in the north, there is pretty mature large per capita consumption of LPG, and of course, production right on the doorstep, in Nigeria, and so on. Morocco is a big market up there. But these are mature markets, and they follow the MET pricing and so on. But in Sub-Saharan Africa, it's really a story of growth.
Ghana has kind of led the way and they've been steadily growing over that time. And now Nigeria is really catching up very quickly. And there's a lot of efforts in East Africa and South Africa to make the most of LPG which has become so abundant, of course, since there's a lot of production in Africa, Nigeria and increasing amounts from Angola, but also relatively competitively priced imports, particularly since the Shale Revolution opened up so much excess supply in the United States. And that's flowed into all markets, including in Africa.
But the challenge remains, I mean, the growth is there, the potential is there, and it remains to be fully unlocked. But the challenge, as ever in Africa has to do with infrastructure and logistics and getting the products away from the coastal areas and into those hinterlands. And there's still a lot of work to be done on roads and rail and pipeline and in storage, and just connecting all the dots so that LPG can get away from the big cities and to the more kind of rural areas where a lot of heating, a lot of cooking rather is still done with charcoal and firewood, and so on. And those are the kind of environmental and public health issues that LPG can do a lot to alleviate.
David: Right. Right. And so it's your impression is that LPG is more of an urban fuel still in Sub Saharan Africa, at this point.
James: At this point, at this point, though there's still a lot of growth in the large urban areas to do. A lot of kerosene is still used and various other things. But there's huge, unlocked potential, particularly in the hinterlands.
David: Yeah. Sure. And I think it's worth contrasting with Asia at this point, how we've seen a number of Asian countries take a subsidy approach with the government, either paying directly for the LPG to various other state oil agencies or private companies or having some kind of reimbursement systems for consumers. And we've seen enormous growth in some of those countries. And I think, what, basically, the five biggest importers of LPG in the world are in Asia, you can take Indonesia and India, in particular, which are big users on the residential sector. And I think we can draw that contrast. That doesn't seem to be a road that African countries are going down. Is that correct?
James: Yeah. That's right. I mean, there are programs and lots of discussions about how can we ease the transition to this, you know, cleaner, more abundant fuel, and a lot of that is about making sure that people get access to safe canisters and the whole infrastructure around exchanging those and maintaining those. There is still a perception in some parts of Africa that LPG is a dangerous fuel because of some notorious incidents at filling stations, and so on. So, there's that. And as you say, the government have not gone down these subsidy routes. They have in some other fuels. I mean, the Nigerian subsidy for gasoline, for example, is absolutely massive and ruinous in some ways. So, there's a hesitation to go down that road with LPG. But there is a move towards more market reflective pricing so that any indigenous production is priced at a fair level and competitive with imports from other places so that the market is starting to kind of put a level at which it's not only, you know, affordable for consumers but also a good bet for the market.
David: Right. And that really brings us nicely to our key topic today, which is import parity pricing in Africa. And you've worked in several countries on this topic. And if we just start in South Africa, could you just elaborate a little bit on what has happened in the past year or so and how things have changed? And then why or why that's good for the market or what the challenges will be with that going forward?
James: Sure. Sure. Well, I mean, for a long time, LPG has being treated in Africa as, in South Africa, in particular, as a kind of a byproduct or something that's essentially blended into the gasoline pool. So, until summer last year, 2020, the official price... South Africa has a range of what is called basic fuel prices, these are government sets monthly prices that provide a cap on what retailers can charge. This was set, for LPG, specifically, as a kind of...linked to the gasoline price. So, imported gasoline had a price, and LPG was linked to that. So, it didn't really matter where it came from, or the fact that it was a different market entirely, used for different things. And this gave a lot of perverse disincentives to people to buy it for one thing, and for importers to import it for another, depending on how the gasoline and LPG markets were behaving relative to one another.
So, after many years of consultation, and things do move slowly until they change, we saw a change in the law in South Africa so that now LPG is priced with reference to LPG markets, which obviously makes more sense. So, the new formula moving away from gasoline linkage was put in place last summer, as I say, last northern hemisphere summer, it was their winter, was to link LPG to the Saudi contract price, which obviously is a monthly posted price from Saudi Aramco, along with freight adjustments from Ras Tanura in Saudi Arabia to Richards Bay, in South Africa. That's the large...or currently the largest import terminal for LPG in the country of South Africa, it's on the Indian Ocean side.
And our company, Argus Media, provides a calculation of that freight rate, a version of which is used in that import parity formula, along with various other costs and adjustments. So, essentially, now what we have is a Middle East price plus freight to South Africa. And that is the kind of core of the imports parity principle which other markets have been using. And gradually more of them are using in order to work out what is the competition? What's the marginal ton of LPG that indigenous producers...because, of course, South Africa has its own refineries that produce LPG. What do they need to be charging in order to be competitive with the import market?
David: Right. And so just to briefly recap, what is the key benefit of doing it this way, instead of having some kind of formulation based on local pricing of other products?
James: Well, the most important thing is to link it to the real world of LPG. As we know, as listeners to this podcast will know, that LPG is a global market, moves from here to there. There's huge demand in Asia, there's a significant exports from the U.S. And Africa is in the middle of that flow and well-placed, not only to sell into that market, excess supply from Nigeria, Angola, and so on but also to suck in those cargoes as they're passing around the Cape. So, if you think about that, if you had some kind of price link or price formula, that wasn't an incentive for people to sell into Africa, or to buy out of Africa, then that supply would bypass it entirely, and it simply wouldn't make landfall. So, if you can harmonize the domestic and international markets through a formula like this, an import parity formula, then it makes the market a lot more dynamic. And it means that both indigenous producers and global importers have an incentive to look at that market and to help it develop.
David: Right. Right. I guess, from month to month, that means you may pick up cargoes. But in the longer term, it means that there is also an incentive in principle for people to invest in everything from terminals to cylinders because they will have some better surety of what they are doing is going to be connected to the origin of where these modules are coming from?
James: Precisely. Precisely that.
David: And then just moving to West Africa, we also have a West Africa index. And this runs on a similar principle, but the position of West Africa [inaudible 00:10:33] does function slightly differently. Is that correct?
James: Yeah, that's right. Well, as I said, the South Africa import parity formula, is a government formula. And the South African Department of Energy has chosen to use the Middle East, Saudi specifically as the source. Now, the truth is, in today's market, much of that supply, as you know, goes to Asia, doesn't come to Africa. And increasingly, the United States and Europe are supplying these markets. And that's, even more the case in West Africa, obviously for geographical proximity reasons. So, for several years, since 2011, actually, Ghana has been using the Argus cif Ara northwest Europe price as the basis of its own import parity formula, which sets a cap at which domestic sellers can put the price.
And then in Nigeria, just along the coast, in the Gulf of Guinea, you also have significant supply coming in from Europe, and also from the United States. So, the formula that we've come up with is the kind of most competitive of those two sources, which is that basically, if you take the price of the U.S. Gulf Coast, add freight, to Lagos. And then if you take the price in northwest Europe, and add freight to Lagos, Nigeria, the cheaper of those two calculations sets our daily index. So, on some days it may be set by Europe, other days by the United States. The principle there, again, is that the most competitive imports should set a price at which domestic sellers can be competitive. And so that's the principle behind that.
David: Right. Okay. So, yeah, this is basically, I guess, kind of constructed version of how delivered prices work in any competitive market wherever there is slightly longer situation, and the prices are lower, could be an advantage to bring in products to the given region so that we see, for example, into the far East into Japan with U.S supply competing with Middle East suppliers, and from elsewhere. Great. Okay.
And then finally, on East Africa, I think that the East African market is a bit less mature in terms of imports up to now. I see the volumes are lower, I believe Kenya is consuming something like 150,000 to 200,000 tons, which is growing significantly each year. But we haven't seen quite the same movement in terms of either the pricing structure or indeed, in terms of capping sellers' retail prices. Is that the situation across East Africa and what do you think is likely to happen going forward there?
James: Yeah, that's pretty much the situation. I mean, just the context that you talked about the size of the Kenyan market, which is the largest regional market over there. Tanzania is also growing pretty quickly but from a very low base. And compared with that we have a market in Nigeria, which obviously is a larger population, but that's about a million tons a year. So, several times is larger, before we even get into auto gas, which is a large potential market over there in the West. In East Africa, of course, it is right...you know, in relative terms, it is right on the doorstep of the Middle East. So, there is significant supply right there and available, though, we do still see cargoes coming all the way around from the United States and into East Africa. It's not a question of shortage of supply. It's more a question of, again, the logistics, I mean, to Kenya, Tanzania, of course, from the coast, but if you wanted to get supply up into places like Uganda, the infrastructure is still developing to make that happen.
And again, the market there, people in terms of what they're using, especially outside of the large urban areas, they're very used to kind of gathering firewood and using charcoal and those kinds of things. So, there is still some kind of preparatory market work that needs to be done to make people see the benefit of using LPG, and again, a novel fuel is only good if you can get your gas canister filled easily and cheaply on an ongoing basis. So, people have been known to try it once. So, that was good. And then the canister runs out and they go out to collect some firewood. So, that's kind of the situation we need to see more investment in infrastructure. Pricing-wise, it's also still linked into the CP in Saudi Arabia. So, that's... You know, you have the proximity factor there, but it doesn't always reflect the imported supply.
David: Right. Right. So, yeah, indeed, it's very much a market area as well as linked to the greatest level of opportunity, but also a lot of work to be done. Great. Thanks very much for your time today, James. We'll wrap this episode up. My name is Dave Appleton, Argus Singapore and I was talking to James Gooder. Goodbye and thanks, everybody, and we'll see you in the next episode. Cheers.