Severity, we’re all fearing it, and soon we will all probably be feeling it. The severity of this awful coronavirus has already hit many countries, and may be returning again as we approach the darkness of winter, but it’s the brutality of a severe economic downturn that worries me most. Only this week here in the U.K., we wheeled-out our top financial man Andrew Baily, Governor of the Bank of England, to prophecise about the fact that GDP, although it went down the plughole by 21.5%, it could have been worse, but to also warn us that it’s not going to get better any time soon. Clearly our politicians were not willing to come on-screen to clarify, hiding somewhere in the corridors of Whitehall. The outlook looks grim, even a 3-5% economic contraction is going to be hell for all of us, but compared to what happened in the second quarter this year, it seems just about tolerable. Even worse, central bankers like Baily have spent years warning of the perils of too much corporate debt, yet their behavoiur in trying to keep companies going in the short term, and stave off a debt disaster, is surely accelerating the next credit crisis. In my mind, this spells a further worry that will ultimately cascade down into the LPG world, maybe we’re feeling it already.
What is therefore concerning me at the moment is the “economic drag” we are seeing in Asia, where optimism of economic recuperation, after appearing to successfully contain the initial outbreak, appears to have stalled. China did bounce back with 3% plus growth in the second quarter, but other northern and southern Asian countries are suffering, both internally and with exports. The Philippines posted a 16.5% year-on-year contraction, a country I’ve not mentioned for a long time, and now Asian refiners are asking to cutback crude oil purchases from Saudi Aramco from next month, a sure sign of demand concerns. Even China has seen the aggressive purchasing of cheap crude oil in recent months now starting to stack-up, as crude oil tankers are floating offshore, an indication that Chinese refinery requirements have also started to slip, again that can only be a factor of diminishing demand.
The Asian LPG market is also mirroring this deflation in the demand bubble, maybe not a burst, but the thought of a drip, drip reduction in demand is probably having a more painful impact on trader’s thoughts. Whatever September supply looks like, demand is far worse, which means there’s too many cargoes trying to find a home in Asia. I can’t remember the last time that the netback economics from the U.S. pointed to Europe instead of Asia, but last week it did. Not that it led to any great pilgrimage of vessels west, but it’s just underscoring Asian demand’s sinking feeling.
The best evidence of price weakness in Asia can always be found in the daily 30 minute window, with offers succumbing to lower and lower numbers as the week progressed. It wasn’t too long ago that we were talking of a flat FEI, albeit for August and not September, but by Friday we were down again at nearly minus $20/ Mt for the front half of September, and not that much higher for the second half. Bids were struggling to be found and no deals were done. Surprisingly, a couple of full propane cargoes appeared to have been traded off the market at the start of the week at similar levels, whoever sold them called it well!
So, as Asia took a drop, surprisingly the European window was being bid, may be a hangover from too many ships arriving a few weeks beforehand now starting to disappear. The problem with Europe is that it’s just not the size of Asia, and although it impacts at the margin, we are not going to see it reverse the Asian downward trend. In fact with pro/naps narrowing to minus $40/ Mt it’s likely we might see a different picture next week. But by the time that happens we could be seeing a throttle-back in U.S. exports. In fact we probably have to also keep an eye on what’s happening with OPEC production as well, lower Asian refinery runs isn’t good news for the production cartel, especially Saudi Arabia.
The ARB has yet again become the focus of whatever attention that still exists, in what has the feeling of a market in typical summer holiday mode. I think the spur of higher and higher freight levels from last week spilled over into this week’s ARB numbers, pushing ARB levels up closer to $120/ Mt despite the overtures of iffy Asian demand. But by Friday the pricing element of the ARB had taken the lead over bulging freight levels, and despite $95/ Mt having been achieved for a Houston to Chiba voyage in September, the ARB failed to react upwards and had slipped $5/ Mt or so. I think more narrowing will take place this coming week. What’s going to be important to determine is how weak the U.S. market is versus Asia. Another week of higher than expected inventory growth in the U.S. has started to put further concerns into the minds of traders, as we again reach the stock peaks of the last 5 years. Exports recovered from the circa 700 M Bbls/d a week ago to over 1300 M Bbls/d this week, but it was only a readjustment, exports are still significantly underperforming around 1000 M Bbls/d.
So, if you take a freight market that appears to have gone up too quickly, weakening of Asian LPG demand becoming more of a reality, a Mont Belvieu market that is plodding along with WTI too close to Brent to ease fears of a narrowing ARB, then netback numbers are bound to be teasing with cancellations. Add in coronavirus, general economic woes and fears, as well as the summer, and you have the recipe for cancellations actually happening. There were rumours and confirmation abound that up to a dozen cancellations had been made, more than fifty percent of them in the second half of August and more appearing in September. We also saw the rarity of terminal operators pushing cancelled stems back into the market at levels around 4 cents/ gallon. Now, historically that’s a low number for exporters to stomach, but maybe it’s not low enough to halt the cancellation momentum.
How quickly export reductions, primarily in the U.S., will feed through to a market already suffering from oversupply, so close to the traditional winter top-up period, is hard to say. I think we are in store for a little more pain yet, especially if you have unsold cargoes, but it’s also time for freight levels to come under pressure. They’ve probably gone up too quickly, and normally what goes up must come down. All eyes will be on how vulnerable the LPG market could become, but then it’s summer and we have coronavirus, so we’re used to a few surprises, aren’t we?