China imports reach new high as PDH use keeps growing

PDH capacity is set to continue increasing, but there are signs that plant margins are turning negative once more, which may suppress propane demand

China's LPG imports and apparent demand surged to a record high in May as a result of improving margins at propane hydrogenation (PDH) plants and stockbuilding at new projects preparing to open later this year.

The country's imports increased by just over a fifth on the month, when it had also hit a new high, to 3.28mn t in May, and was up by more than a half from a year earlier, customs data show. This comprised 2.55mn t of propane and 734,000t of butane. China's apparent demand, which is measured by adding domestic production with net imports, also increased to a second consecutive record high, rising by 9.4pc on the month to 7.73mn t, as output from refineries inched higher while exports on coasters from south China dropped.

PDH margins switched from negatives to mild positives from late March, averaging $15/t and $9/t in April and May, compelling operators to run facilities at higher rates. PDH utilisation in the country rose to 77pc by 31 May from 64pc on 3 May. Besides the increase in operating rates, two new PDH plants started up in late May and early June to further support propane imports. The newly-opened 600,000 t/yr Yanchang Zhongran facility in Jiangsu province in east China and the 600,000 t/yr Grand Resources 2 unit in south China's Guangdong province consume around 60,000 t/month of propane initially. This adds to the 1.31mn t/month of propane consumption from the PDH sector.

China's LPG re-exports declined by 16pc on the month to 71,000t in May, of which 29,000t was propane and 42,000t butane, leaving net imports at 3.21mn t. Better domestic wholesale margins discouraged terminals to re-export to southeast Asian buyers in May, an importer in south China says. Domestic LPG production rose by 2.2pc to 4.52mn t in May as strengthening petrochemical and gasoline margins encouraged refiners to keep run rates at high levels.

The US remained the single largest source of supply to China in May, accounting for 42pc of China's total LPG imports. Continuously high exports from the US and rising demand in the PDH sector diverted more US propane into China.

Propylene flow growth

The opening of more new PDH plants in China is expected to continue bolstering LPG imports and demand despite weaker margins and operating rates in June amid an oversupplied propylene market. The project schedule still has another nine PDH plants due to open this year with a combined capacity of 5.9mn t/yr, five of which are likely to start up in the third quarter, adding around 270,000 t/month of propane import demand. These are the 450,000 t/yr Oriental Energy Maoming 1, 600,000 t/yr Sinochem Ruiheng, 450,000 t/yr Huahong Petrochemical, 600,000 t/yr Formasa Ningbo and 600,000 t/yr Shandong Befar. China's total PDH capacity is expected to be above 22mn t/yr by the end of this year, which is equivalent to more than 26mn t/yr of propane imports when fully operational.

But some market participants are concerned at how long current high imports can last, as PDH margins fall back into negative territory, although utilisation remained above 70pc in late June. Northeast Asian propane import prices on the Argus Far East Index typically begin to rise from later in the third quarter as stockbuilding begins prior to the winter heating seasons, while a continuing surplus of propylene should cap propylene prices, worsening PDH margins and weighing on operating rates, a PDH operator based in east China says.

Some new plants expected to start up could also be delayed on the back of high import costs and poor margins, he adds. China's LPG imports fell by 13pc on the month to 2.65mn t in June, according to Vortexa, which shows slightly lower import volumes than customs given discharge and customs declaration dates, and potentially missing some Iranian cargoes.

China PDH operating rates %