LPG market volatility increased in 2018, reinforcing the growth of spot trading and the need for an accurate index to price the Asia-Pacific market.
Seasonal demand patterns were disrupted in 2018, with a weak winter followed by a strong summer. The first quarter, when winter heating demand typically peaks in northeast Asia, instead saw a 20pc decline in delivered prices from December's close. Prices then rose from May until October, defying expectations that the market would weaken during the hotter summer period.
A price correction followed in early October, although many market participants found it premature ahead of an expected shock from the reimposition of US sanctions on Iran in early November. Asian prices fell by nearly 28pc in seven weeks from early October to late November, outpacing 20pc losses in the Brent crude benchmark during the same period.
Retaliatory trade tariffs on US imports imposed by the Chinese government had much wider ramifications for the Asian marketplace than their impact on Chinese buyers alone.
US supply accounted for 20pc of China's total imports in 2017. The 25pc Chinese tariffs on US LPG, which were imposed in August, prompted Chinese buyers and their term suppliers to look for alternatives from the Mideast Gulf. Buyers were forced to pay a $5-15/t premium to swap or purchase non-US origin cargoes, with these origin swap differentials peaking at $20-23/t for November-delivery cargoes as buyers feared the loss of Iranian exports as a result of sanctions.
But the unexpected slump in crude benchmarks, which coincided with the US granting bigger-than-expected sanctions waivers to major buyers of Iranian crude, was mirrored by a rout in global LPG prices. State-owned Saudi Aramco set its contract price (CP) for propane at $655/t for October, but this plunged by $115/t to $540/t for November. The December CP fell further, to $450/t.
The sharp declines left consumers in China, India, Japan, South Korea, and southeast Asia that have term and spot contracts priced off the CP with stocks they were forced to sell at losses of up to $200/t. Some such consumers had earlier paid premiums of $5-23/t for Mideast Gulf supplies, in competition with Chinese buyers looking to secure cargoes.
The sharp volatility brought on by market risks and "black swan" events reiterates how LPG users can benefit from a more responsive, liquid pricing mechanism. Swaps trading volumes on the Argus Far East Index (AFEI), a daily assessment for delivered refrigerated LPG, rose sharply in 2018, as the index factored in demand and supply fundamentals as well as crude gyrations — in contrast to a monthly posted price with no published methodology. The outsized impact of the US-China trade war is also highlighting risks to contract prices that are driven in large part by demand in China.
AFEI swaps cleared on the CME and Ice exchanges totalled around 94mn t in January-October 2018, in line with volumes for 2017 as a whole. But CP clearing volumes fell by about 50pc over the period.
There is no guarantee that the intense volatility endured by the market in September and October will be repeated, but market fundamentals point to an increase in spot activity in 2019, and the need for a transparent pricing mechanism to reflect this.
