Editorial: Satisfied customers

A strong supply of LPG and firm growth in exports are providing a positive outlook for 2023 despite a number of uncertainties on the horizon

Those wanting the clouds of 2022 to part as the new year begins may have their hopes quickly dashed, with myriad challenges and uncertainties still on the horizon. But LPG at least starts the new year on a solid footing in terms of supply, with the subsequent pressure on prices to come as a relief to consumers feeling the pinch.

The growth in US production of natural gas liquids shows no signs of abating this year. Crude and natural gas prices seem likely to remain elevated, supporting upstream output and midstream yields of fractionated LPG. The country's LPG inventories fell sharply at the end of last year, partly owing to the harsh winter storms that swept into the northern US over the Christmas holiday. But even after a few weeks of robust stockdraws, regional stocks in the US continue to sit significantly higher than they were earlier, and demand in key importing countries remains underwhelming — forward curves in Asia-Pacific and Europe are slightly backwardated during peak winter season.

US Gulf and east coast exporters' recent freight headaches from surging VLGC rates in the fourth quarter of 2022 have died down in early 2023 as congestion cleared at the Panama Canal — a reprieve that may be short-lived. Yet demand from buyers in Asia and Europe remains weak on slower economic activity and warm winter weather. In China, the propane dehydrogenation (PDH) sector's inexorable growth is expected to continue despite abundant propylene supplies and weak demand. Beijing has also opened up the economy by tearing up its zero-Covid rules, although the impact on LPG use has so far been minimal. PDH margins and utilisation should stay depressed this year as more plants open and competition builds, while consumption of LPG as fuel faces its own competition from users switching to cheaper coal or electricity. This is without mentioning steadily rising Covid-19 rates.

Uncertain market conditions and increasing Mideast Gulf supplies are encouraging Chinese buyers to turn from term contracts to more agile spot purchases. In doing so, they will hope the VLGC market settles after rates rose ferociously in the fourth quarter on Panama Canal delays. This seems possible because of tepid import demand and a substantial influx of newbuild VLGC deliveries this year, which will boost vessel supplies. Equally, further anticipated congestion at the canal and new IMO shipping regulations causing older vessels to slow down in order to comply could put spot buyers in a bind, particularly if a sudden uptick in demand emerges.

Europe's drop in LPG output owing to high natural gas prices has been offset by a sharp rise in US imports. Regional prices look likely to remain under pressure in 2023 if weak heating and petrochemical demand persists as expected. Large parts of Europe have experienced unprecedented winter warmth — temperatures in countries such as Poland in late December reached levels typical for summer. Added pressure will come from low naphtha prices limiting the competitiveness of LPG as a cracker feedstock. All the while, plentiful US exports should keep supplies high and prices low, with petrochemical buyers providing the price floor.

Don't turn around

Consumers of LPG as a cooking fuel in developing economies, and governments grappling to restrain retail prices during surging inflation and weaker economies, will welcome the respite from pressured import prices. Many countries face consumers turning back to cheaper, and often more harmful, alternatives, so a decline in prices can help stem this retrograde transition. The commercial and industrial sectors that continue to be hurt by the slowing economy will also be thankful for any price softening, and new LPG customers from both could emerge if they turn away from natural gas. Autogas use could expand in some unexpected areas if drivers attempt to rein in spending. But any uptick from the aforementioned is expected to be more than offset by a strong supply outlook in 2023.