LPG price rise cuts PDH margins but demand still strong

Propane prices have hit multi-year highs supported by low US stock inventories, write Frances Goh and Yaxiu Wang

Sharp increases in Asia-Pacific propane prices have significantly cut propane dehydrogenation (PDH) margins in China this month. But price falls towards the middle of July have pulled margins back from the brink of losses, and firm demand for LPG from petrochemical producers in China and Japan is expected to continue.

PDH margins have narrowed rapidly from a high of $300/t in early May to just $13/t as of 13 July as a result of declining olefins prices and surging propane values. Cfr northeast Asia propylene prices hovered at close to a yearly high of $1,097/t on 19 May, on an import parity basis, before easing to $989/t by 13 July after a number of PDH facilities returned from maintenance shutdowns and drove operating rates up to 87pc.

Feedstock prices faced different dynamics, pushing delivered Japan propane prices up to a six-year high — the Argus Far East Index (AFEI) hitting $713.75/t on 6 July. AFEI prices have risen by around a quarter from mid-May to mid-July during the typical summer lull in demand and when buyers profit from lower prices.

Regional propane prices have been supported by US inventories flirting with the lower end of historical trends, with concerns mounting the stocks will not adequately build before winter. Asia-Pacific prices had to compete with rising US values to maintain arbitrages and meet growing demand in China and Japan. Non-petrochemical demand in the key import markets of India, Indonesia and south China have ebbed and flowed, affected by Covid-19 rates and restrictions, but east China's imports — where the majority of the country's PDH and LPG-fed ethylene crackers are found — have remained on an upward trajectory as capacity increases.

China's LPG imports hit a record high of 2.24mn t in May, while arrivals from the US doubled to 3.78mn t in the first half of this year. The influence exerted by US exports on China's PDH sector and vice versa is set to deepen as more capacity is brought on line.

Another two PDH plants are due to open in July-August. Anqing Taiheng's 300,000 t/yr unit in Anhui province, which will be half fed by imported propane, is expected to start up in the second half of July and has started buying pressurised propane cargoes from domestic terminals, traders say. Qingdao Jinneng's 900,000 t/yr unit in Shandong province — the largest in the world —could follow suit, with the firm expected to start trialling its propylene unit this month.

Riders on the storm

PDH operators with integrated downstream units are better suited to ride out the surge in feedstock costs, traders says. Cfr northeast Asia polypropylene raffia prices were firm at $1,100/t as of 16 July. But more importantly, the opening of new PDH plants or expanded ones has led to fierce competition for market share. Established facilities have been exporting propylene and polypropylene since the start of 2021 to carve out their position in an increasingly crowded space. Arbitrage opportunities for olefin exports to Latin America and Europe opened up in the first quarter, partly triggered by the severe cold weather in Texas, US, in February, which took producers off line. This enabled some Chinese PDH operators to make inroads into olefin and polyolefin import markets.

In Japan, demand for propane and butane cargoes for August and September delivery has been firm despite the start of summer and a flat forward price structure, limiting interest in stockbuilding. The country's flexible crackers have continued to favour LPG despite narrowing discounts compared with naphtha owing to attractive downstream yields. Propylene availability in Japan is tight on planned and unplanned shutdowns, while cfr northeast Asia butadiene prices are near three-year highs at $1,425/t as of 16 July. And Japanese refiner Eneos' cracker is expected to run at 80pc until February 2022.

China PDH margins, utilisation