Petrobras LPG pricing shifts to track crude

Petrobras' LPG prices are starting to closely track rising international crude values as Brazil's state-controlled company seeks to attract imports of the fuel as well as investment in its refining assets.

Petrobras is making its LPG prices more responsive to crude price variations, partly to make its refineries more attractive to investors as it pushes to divest the assets by the end of the year,according to Brazil's LPG distribution industry association and a specialist.

Petrobras' sale of one of these units, Refinaria Landulpho Alves (RLAM), was approved this month by Brazilian competition watchdog Cade.

Petrobras' LPG prices for distributors rose by 83pc in the 12 months through mid-May, similar to Brent prices that rose in the same period by 90pc. Petrobras' LPG price was R3,208.85/metric tonne ($654/t) on 14 May 2021, up from R1,753.03/t a year earlier.

In the year-earlier period, there was little correlation between the two commodities. Petrobras' LPG prices fell by 10pc through 15 May 2020 from a year earlier, significantly trailing a 52pc drop in Brent.

The Brazilian association of LPG distribution companies, known as Sindigas, acknowledges that LPG prices track international crude prices, but only recently has there been an earnest effort to pass price fluctuations on to distributors. Petrobras is now more directly passing on international price fluctuations because the company is giving up its role as the sole guarantor of the national LPG supply as Brazil's new natural gas law opens up the market and Petrobras moves to reduce its share of domestic refining, the association said.

"Petrobras needs to price (LPG) in a way that generates incentives and gives confidence to potential investors," Sindigas said.

For residential consumers, the price of a 13 kilogram LPG cylinder rose by an average of 19pc to May 2021 from April 2020. Distributors say they reduced their sales margin by nearly 14pc to cushion customers from higher Petrobras prices. The federal government also reduced LPG taxes by 6.79pc in this period.

Petrobras adopted international price parity for its refined products in 2002, but it was only in 2015 that the company was allowed by its major stakeholder, the Brazilian Union, to increase prices frequently. By 2019, with a new board running the company and focusing on upstream activities, Petrobras planned for LPG prices to more closely reflect crude fluctuations, but when global Covid-19 lockdowns sent crude prices tumbling, the policy was not fully implemented.

The perception that Petrobras now is following the international parity pricing policy is an important signal for other companies to invest in Brazilian refining and also to start importing LPG, said Pedro Rodrigues, director at Brazilian Infrastructure Center (CBIE), a consultancy for energy and infrastructure.

"Petrobras pricing for LPG is changing as Petrobras follows its divestment plan in refining," Rodrigues said. "It gives autonomy to the company and more confidence to investors that the government is not going to interfere in pricing."

LPG sold in cylinders represents 25pc of Brazil's energy mix for residential consumers. Petrobras is the main supplier for LPG in Brazil, with 99pc of the market, selling the liquefied petroleum gas to distributors that package the gas and distribute it, typically via trucks, for sale to households.

Brazil is short on LPG and depends on imports to supply 34pc of the market. According to research conducted by BMJ Consulting, Brazil last year imported $309mn of mixed LPG, and pure propane and butane.

Petrobras did not immediately respond to a request for comment on its LPG pricing strategy.

By Flávia Pierry

Brent X LPG Brazil