Peter: Hello, and welcome to "Global LPG Conversations," the Argus podcast where we cover the latest developments in LPG markets and prices. My name is Peter Wilton, editor of the International LPG Report here at Argus and manager of our European price reporting team. Joining me today is my counterpart in Singapore, Frances Goh. Hi, Frances.
Frances: Hello.
Peter: So the last time we sat down together was part of a three-part podcast series we did globally reflecting on the fallout of the initial ramp-up of the U.S.-China trade war. I think at that time tariffs in U.S. LPG into the latter were ramped up to 145%, which was effectively an embargo on trade flows really. But following the 12th of May de-escalation after trade representatives of the pair met in Geneva where they agreed to a 90-day walk back to just 10% on U.S. exports to China. Since then, how, Frances, have things sort of shaken out in the Asia-Pacific markets? I mean, have we returned to sort of business as usual?
Frances: Yes and no, but mostly no, because we have seen, in the last three to four weeks, spot trading remains patchy for we have seen that purchases may not necessarily be governed by financial logic, but by political concerns. Since bilateral tensions between the U.S. and China remains high, many buyers in China still prefer to pay a $5, $10, $15 premium for non-U.S. origin cargoes for peace of mind in case the pause on tariffs unravels before the 90 day is up. The Chinese market can broadly be described as being three tiered, whether it's a Middle East, African, Australian one, a U.S. one, as well as a Canadian one, where the price disparity has fluctuated between $10 to $20, depending on various factors. Depending on the political mood, Chinese buyers can take U.S. origins, but prefer not to, to avoid that risk, the trade war risk. Like such as, you know, one week in we hear of a bunch of CP-linked deals for non-U.S. origin cargoes, and the next week we hear of a bunch of AFEI-linked deals of U.S. origins.
And then increasingly so, Chinese sellers are seeing offers on a fixed price basis to China, which harks back to seven, eight years ago where Chinese importers were less savvy with swaps trading instruments. I mean, as we await further trade negotiations to achieve success and tariff wars to be scaled down, I guess it is fair to say the worst is behind us since we have seen prohibitive tariffs effectively cut off U.S. supply to its single largest buyer and the market had quickly rebalanced. So it seems that we have lived through the worst of times. Traders and importers have become smarter.
Peter: Yeah, well, yeah, quite, I guess, a lot. Well, a lot going forward is going to hinge on what comes out of the latest meetings between trade representatives of the U.S. and China currently taking place in London, where I'm recording today on the 10th of June. So far, it's been tight lips on both sides after those meetings, so no insight gleaned as yet. But I wonder if we could just drill down further into the Chinese market. I think listeners would be interested to get some insight into what exactly is driving the demand for propane because globally, petrochemical markets and margins are under some pressure. So are downstream prices holding up there to support these imports?
Frances: Well, after a period of volatility where term contracts between Chinese buyers and their suppliers had to be negotiated, it appears that downstream petrochemical prices continue to drive propane demand. Market participants continue to monitor Chinese domestic propylene and PP futures prices to determine how much and at what price PDH operators are willing to pay for propane feedstock. Chinese propylene prices have fallen by about 8% in the past two months, while PP-DCE futures prices lost about 6%. Even though each petrochemical plants may have their own cost-benefit calculations, but broadly speaking, propane import prices has corresponded to movements in the Chinese PP prices.
Peter: Right, sure. So still, yeah, eyes on those Chinese PP prices for how the import levels are going to be, as has been for quite a while now. And how does sentiment look going forward there? I mean, it can't be much fun navigating the current geopolitical landscape, which seems to change week by week.
Frances: Yeah, to say that the LPG market is fraught with uncertainty is an understatement. PDH run rates have surprisingly held up. It has fallen and rebounded and is currently at 66% last week because operators adjusted according to their downstream yields and cash flows. Some plants, which also cracked butane and naphtha, would be in a better position than on-purpose propane units. The outlook remains bearish because of high propylene supply weighing on domestic prices. There is an estimated 3.2 million tonnes per year of propylene production capacity due to come online as new refineries and crackers start up. So the pressure on these PDH margins will prevail. But the LPG market is highly efficient, so supply and demand forces will reset prices very quickly.
Peter: Right, sure. Yeah, that makes sense. Quite some pressure coming from, yeah, 3.2 million additional capacity coming online. I guess that's pretty clear how things are in China, as it stands at the moment at least. But of course, Asia-Pacific region is somewhat larger than just China, even if that nation is what's been caught in America's crosshairs so much of late. So how is the rest of the region doing? I mean, massive markets like India and Indonesia, for example.
Frances: Well, India and Indonesia have seen higher U.S. inflows in the past two months because of the rerouting of U.S. shipments via the Cape to cope with the loss of Chinese demand. Increased supply had weighed on spot premiums, so both of these CP markets have seen much lower spot premiums, CP value notwithstanding. As we enter the summer month, stock building by North-East Asian importers, basically Japan and Korea, have also slowed compared to last month. The spread on U.S. versus non-U.S. origin cargos has also come in a lot, you know, on paper from $130...$40 to $60. So the initial burst of spot demand from these four main Asian importers have also slowed. But as we move towards Q4, things could get interesting again. So stay tuned.
Peter: Yeah, I think you're right about the only thing that is certain here is that we've not hit the end of this story just yet by any stretch. But for now, I think that pretty much covers how the land lies. So thank you very much for your insights today, Frances. And we'll be back soon with another edition of "Global LPG Conversations" on this very topic, no doubt, before long. Perhaps just within days, actually, if something substantive comes out of the London meetings between U.S. and China representatives taking place right now. So yeah, all that remains for me to do is to thank all of our listeners very much for continuing to tune into the series. And please do look out for subsequent editions on all the major podcast platforms.
