SIMON SAYS: The Big “C” Word

Submitted by Simon Hill on Sun, 02/09/2020 - 17:00
The Big “C” Word

Before I start, I must say the headline I’ve used is nothing to do with swearing, although having said that, I did find time for a chuckle this week, hearing President Trump, in his post impeachment acquittal celebratory speech, say the word “bull****”, a word maybe a little more acceptable across the pond than here in the U.K., especially on the BBC. Although the live broadcast had no time to react, the subsequent news programmes had the second syllable bleeped out. The BBC always seems to be trying to get what is wrong, right, albeit after the event!

The big “C” word is “China”, and reference to the country is headlining in all news feeds, including our world of LPG. Like the fears associated with the current spread of the coronavirus, players in the international LPG market are trying hard to work out what impact this worsening and severe virus will have on trade in and out of China, directly and indirectly. My nephew works in Shanghai for Her Majesty’s Government, and I fully appreciate the human fears and realities impacting people’s daily lives, not only in Wuhan, but in the rest of Asia and now beyond. Isolation and shut-in will start to impact Chinese supply and demand numbers, just as faltering economic growth in the country was starting to make headlines of its own. Now we see health, the financial markets, movement by air, sea, rail and road, the domestic, regional and worldwide economies all potentially getting wrecked! On top of that is the fact that the oil and LPG markets are pretty much obsessed with China, especially Chinese demand! So the scare mongering by the world’s press might be out of proportion, but it’s this sort of stuff that drives markets, whether the market’s crude oil or LPG.

The other attention-grabbing news related to China is associated with the easing of trade tariffs between the U.S. and China. With concerns over the world economy, and especially China’s own growth performance, now further impacted by the spread of coronavirus, there was more than just a modicum of pressure coming to bare on the leaders of both countries to take the pressure off and move the agreement process further forward. But what we need to remember, is that this is not a return to the tariffs of the Obama era, this is just a pull- back from the severity of the tit-for-tat increases imposed by both sides. Our eyes are on LPG, waiting for a response from Beijing. The Chinese government announced cutting in half the import tariffs on over $75 billion of U.S. products, but would LPG be included? It appears not. The 26% import tax on U.S. propane remains in place, but China has agreed to increase its imports of U.S. goods, including LPG, so maybe they know something we don’t. For what it’s worth, effective next Friday, the duty on U.S. butane will be lowered by 2.5% but come-on, at 28.5% it’s not going to change much at all.

The market has recently been struggling to provide non-U.S. origin propane cargoes, primarily to satisfy the appetite of the Propane Dehydrogenation (PDH) sector, both new and old. The premiums being paid for cargoes out of the Middle East has showed China’s reliance on a specific region, where the impact on the price of crude oil resulting from the increasingly vocal “demand bears”, has brought growing pressure on OPEC to cut-back on future production. That continues, but now the equation has changed, as Chinese demand for oil products is likely to take a massive hit, especially if we are to believe the commentators out there. The LPG market doesn’t yet have enough answers, but we’ve already seen the pricing “cliff” happen, with absolute prices falling with crude oil and the premiums in the market pushing backwardation flatter, from peaks in the premium over the FEI price of more than $50/ Mt earlier in the winter season. Physical deliveries are still labelled as March arrivals, albeit second half, but the demand momentum has all but gone, with the combination of post winter buying habits and the severity of the coronavirus dominating future buying thoughts.

So, do we really care what’s happening in the U.S., and the lack of actual, rather than hypothetical, increased export capacity? Maybe less so than we felt a few weeks ago, but the pendulum will always swing to a new equilibrium, and LPG exports from the U.S. are going to have more of an impact on the levels of domestic prices across the shale producing regions, than maybe they will on the Asian economies likely to be hit by world economic stuttering, made worse by the destabilizing impact of the coronavirus.

It must sound as if I am repeating myself, as far as U.S. exports go, but it does seems as if “what you see is what you’re going to get”, certainly for the next six months or so. I’ve always been brought up to believe, that in the LPG world it is supply that creates demand, and we are faced in the short term with demand not only performing its usual seasonal drop, but the take-up of the slack by the olefin crackers might be in doubt, as they themselves may well be facing far more daunting economic woes than even the soothsayers of Davos were predicting a few weeks ago. So, if Asian demand in the near term is about to slide, and let’s not forget there are reports of Chinese LNG importers threatening to cancel up to 70 per cent of seaborne imports in February as demand collapses, and companies struggle to staff port operations. In addition a lot of commentators are saying that in February alone, as much as a quarter of the normal Chinese demand for oil and its derivatives will have been cut. We would expect factories not to be working at this time of year anyway, given Chinese New Year, but if coronavirus doesn’t start to dissipate, then the markets, including that for LPG, are in for yet more turbulence, and you bet it will find its way back to the U.S. in some form or another.

The worst scenario, even with OPEC struggling to maintain its own production ceilings, therefore impacting LPG export volumes from the Middle East, is that the number of U.S. cargoes being offered for re-sale will increase, despite there being relatively few new slots. A surplus of cargoes could well lead to terminal fees coming under strong downward pressure, and the dreaded “cancellation’ word might well re-appear in the LPG vocabulary. If that’s the case who cares if Enterprise have 10 extra slots a month or not. The impact will be visible in the U.S. propane stock levels published by the EIA, and we are going to be leaving the winter season “draws” in less than 5 weeks, and at levels that might have an 8 stuck on the front of them!

So, we are maybe having a taste this week of what might be to come, with terminal re-sale fees slipping to mid-single digits, freight levels falling by $10/ Mt, and dare we say the ratio of Mont Belvieu propane to WTI crude oil sub 30%, and it looks likely to fall further. Who would have thought this would be possible a few weeks ago, when the ARB was over $300/ Mt, terminal fees were nearly as high in cents/ gallon as the premiums being paid in the window in dollars per mt, but then, let’s not forget it is the LPG market!