Coronavirus dampens Chinese LPG demand outlook

China's LPG demand is poised to stay weak until at least the end of this month amid a slowdown in residential and petrochemical consumption following the impact of the country's coronavirus outbreak.

The falling consumption has forced China's refiners and import terminals to slash domestic LPG prices to clear inventories and free up storage space.

The 460,000 b/d Zhenhai refinery in east China cut its price by 10pc to 3,850 yuan/t ($550/t) between 23 January to 11 February. The nearby Ningbo terminal dropped its price by 8pc to Yn4,350/t. South China's Guangzhou refinery reduced its prices by 10pc to Yn3,825/t, while the nearby Nansha terminal cut its price by 13pc to Yn4,120/t.

Strict measures to contain the coronavirus epidemic have curtailed transport within and between cities, slowing down civic activity and shutting businesses such as restaurants that accounts for a large portion of residential LPG use.

Cross-region transportation is expected to gradually recover after the Chinese government yesterday said road, bus and rail transport has resumed within and between many provinces and cities most affected by the coronavirus.

But the closure of businesses in Hubei province, the epicentre of the outbreak, has been extended to 20 February. A lack of workers, logistics restrictions and limited availability of protective face masks is likely to see only a portion of downstream manufacturing resume in other affected provinces.

"Though the provincial government has allowed factories to resume work from 10 February, only a limited number have resumed production," said an official at a chemical plant in south China. "Local governments are still very cautious to give permission due to the infection risk and there are still many challenges faced by those factories, like not enough workers and limited sales."

LPG demand from the petrochemical sector, China's second-largest LPG consumer sector, has also been affected.

Operating rates at propane dehydrogenation (PDH) units in east China dropped to 78pc in the week ending 12 February from 84pc before the lunar new year holidays in late January prior to when the coronavirus outbreak restrictions began.

"The run rate will continue to drop, as the downstream plastic converters are mostly not back at work, so demand is still very poor," another Chinese importer said. "Though some PDH plants like Juzhengyuan can produce medical use polypropylene, it is just a small part of their total demand."

The main refineries have been able to balance supplies and demand through production cuts and lower prices, a refiner in east China said.

A significant cut to refinery runs in east China's Shandong province cut LPG production to a point where LPG prices at state-controlled Sinopec's 200,000 b/d Qingdao refinery rebounded earlier this week from Yn3,450/t to Yn3,600/t.

Import terminals in south China are running out of storage space for cargoes arriving for discharge because of the slowdown in domestic sales. Prices at refineries and terminals in south China's Zhujiang or Pearl river delta area remain under pressure as earlier price cuts have so far done little to spur demand, a regional importer said.

Waning domestic consumption has also pressured import prices. Propane premiums delivered on a cfr basis into south and east China have dropped by 20pc since the end of January to $64/t and $70/t above the front-month Contract Price respectively.

The lack of domestic demand has seen some cargoes destined for south China redirected, either to PDH units in east China or to other countries.

The very large gas carrier (VLGC) BW Carina, which was originally destined for the south China port of Dongguan in Guangdong province, was diverted to the Turkish port of Dortyol on 7 February, eight days after left the Escravos Gas terminal in Nigeria, data from oil analytics firm Vortexa show. The VLGC had been due to arrive in Dongguan on 5 March.