LPG 'relatively unscathed' by 2020 turbulence: Argus

Global LPG demand has been left "relatively unscathed" by the Covid-19 pandemic, delegates heard at Argus' LPG Market Discussion today.

Last year was a near "Covid-proof" year for LPG relative to the wider oil products market, with Argus estimating that demand fell by just 2pc, or roughly 6mn t, from 323mn t in 2019. This compares with drops of 14pc for gasoline, 7pc for diesel and 10pc for crude. LPG "has not at all been impacted in the same way" and was "much more resilient" due to its more diverse demand profile, said Argus' LPG business development executive David Appleton.

Driving this resilience was rising import requirements from most of the large demand centres in Asia-Pacific, with the exception of Japan. LPG imports to China, India, Indonesia and South Korea rose by 3pc to hit 60.1mn last year, according to Argus data. While "growth is smaller than previous years" in these rapidly expanding markets, it remains "striking in the current environment", Appleton said. The expansion of China's domestic petrochemical sector, including new propane dehydrogenation (PDH) and ethylene crackers coming on stream, was a key driver of demand growth there, while Indian imports were underpinned by rising demand for heating and cooking, buttressed by a "flagship government policy" supporting domestic LPG use, Appleton said.

In contrast, European petrochemicals was a sector that saw a substantial drop in LPG demand in 2020, with consumption slipping to just under 13mn t last year from around 14.5mn t in 2019, according to provisional Argus data. Flexibility in operations and the coastal location of many European crackers allow feedstocks to be switched with relative ease. Last year, when resilient LPG demand in other sectors led to a sharp rise in propane prices versus alternative feedstock naphtha, which was under pressure from a global drop in gasoline blending demand, propane consumption at European petrochemical plants fell.

Meanwhile, LPG use in commercial and transport sectors declined globally last year, driven by the impact of the pandemic on economic activity and travel. Argus estimates that transport and commercial LPG fuel use dropped by a fifth to around 32mn t in 2020. These losses are "in principle" reversible, given that Covid-19 was the core driver, according to Appleton.

Trade flow trends

Besides reviewing 2020, the discussion also focused on trends in LPG trade flows over the last decade and the impacts these have had on LPG values and price benchmarks globally. The US' transformation from a net importer at the beginning of the last decade to being the world's largest exporter, both by volume and by geographical reach, is the dominant trend. In the last five years, the US has "almost doubled its market share" in Asia-Pacific's five biggest markets — China, India, Japan, South Korea and Indonesia — and "2020 saw more than one third of imports into those countries originating in the US", Argus senior vice-president and head of LPG in the Americas Vanessa Viola said.

"We can also see major changes in the LPG trade between the US and Europe," she said. The US' share of European LPG imports has risen by 10 percentage points in the last five years to reach 36pc in 2020. Argus expects this trend to continue, helped by "structural changes in the Russian market", Viola said. A steady decline in Baltic LPG exports is expected to continue as Russia diverts domestic supplies to its rising petrochemical capacity.

These stark shifts have had a significant impact on LPG pricing globally, with high US supply prompting increasingly strong correlation between regional benchmark prices in the US and prices in the key net import regions of Asia-Pacific and northwest Europe. "With US LPG conquering market share both in Europe and Asia, the biggest question has been which trading hub leads which benchmark," Viola said. "What we've seen is that in an oversupplied market it is typically the destination that sets the global price of LPG."

Given the abundance of US supply, it is Asia-Pacific delivered prices, specifically the Argus Far East Index (AFEI) price assessment, that are most often leading price direction in the US, as opposed to domestic factors. The AFEI netback to the US — AFEI minus Houston to Japan freight costs — is tightly connected to US Gulf coast propane export pricing — US pipeline plus terminal fees. The multi-year correlation between the two price series is very strong, delegates heard. The AFEI often goes as far as giving price direction for the delivered large cargoes market in northwest Europe, which is assessed under the Argus cif ARA benchmark. This is because European buyers must compete with their counterparts in Asia-Pacific for spot US propane.

By Peter Wilton