South China LPG importers incur losses amid oversupply

An oversupplied wholesale LPG market in south China's Guangdong province resulted in financial losses for import terminals in this year's second quarter, forcing them to reduce imports in July.

Operating costs at import terminals in south China were around 150-200 yuan/t (21.60-28.80/t), but the premium of prices in the domestic market over imports was not large enough to cover these costs. The yuan equivalent premium of the Argus Pearl River Delta (PRD) index, reflecting domestic prices over the Argus south China propane index reflecting import prices, fell from Yn420/t in April to Yn141/t, Yn8/t and Yn134/t in May, June and July respectively. The yuan equivalent includes foreign exchange, import tariffs, and value-added tax costs.

Weaker demand, as a result of the Covid-19 related lockdowns and rising supplies from higher imports, increased output from domestic refineries and inflows from other regions in China were the main reason for eroding profit margins for terminals in Guangdong.

While demand from the residential sector has recovered to normal levels, consumption by the commercial sector, mainly from restaurants, remained weak. LPG demand from the wholesale sector was 20pc lower than typical levels during May-July, according to a Guangdong terminal operator. Restaurants revenues fell by 38.9pc from a year earlier during January-May 2020, according to Guangdong government data.

But the period saw seven LPG wholesale terminals in Guangdong boost their imports, even as demand started to fall away because of seasonally warmer weather. Second-quarter imports were 20pc higher from a year earlier at 1.59mn t, which was 81pc higher from the first quarter.

Domestic supplies also picked up from the end of April as refineries in Guangdong raised run rates amid an emerging economic recovery. Guangdong LPG output rose from 324,000t in April to 395,000t and 423,000t in May and June respectively, national bureau of statistics data showed. Most of the incremental volumes were sold into the residential and commercial sectors.

Zhejiang Petrochemical's 400,000 b/d refinery in east China started to sell mixed pressurised cargoes into south China from the end of April. Its monthly sales volume was about 40,000 t/month in May and June, with 50pc flowing into Guangdong. LPG flows into Guangdong from other parts of China was about 30,000-40,000 t/month in March and April, reaching as much as 50,000-55,000 t/month in May and June.

Terminals at Guangdong had to curtail imports in July as the deluge of supplies filled up storage tanks. Import volumes in July fell to 411,000t, 18.4pc lower than June, data from oil analytics firm Vortexa showed. Output from refineries in Guangdong also dropped after LPG profit margins weakened. A cut in LPG supplies into the domestic market by Zhejiang Petrochemical with the start-up of its propane dehydrogenation unit in mid-July, which can produce 600,000 t/yr of propylene, also helped reduce oversupply in July.

Hong Kong-listed New Ocean Energy, the owner of one of the seven main terminals in Guangdong, said in July it expected to record a consolidated loss of HK$340mn ($43.9mn) in this year's first half. It cited delays in trade receivables collection and losses on inventory values as the main reason for the loss. Most of the terminal's losses were incurred as result of oil products trade that makes up 75pc of the terminals business, with LPG accounting for the remainder of its activity.