SIMON SAYS: Give me a system any day, and a few VLGCs for good measure!

Submitted by Simon Hill on Thu, 11/21/2019 - 17:00
Give me a system any day, and a few VLGCs for good measure!

I was kindly invited to attend the first Argus LPG Awards for Excellence ceremony, this week in London’s Science Museum. I have to say it was a great success, and was lovely to see such a broad representation of our business, and some worthy winners as well. “You know who” picked up the best trader award, yes I do mean Seb Willems at Glencore, and he’d already got his winner’s speech prepared, that’s why he is #1, it’s all in the preparation! Mary-Jane Hogg deservedly won the executive of the year, and there were awards for Ineos, GE Power and Noreen Howat at Aggreko. Also well done to all and everyone at Petroleum Argus who made it happen.

Seeing Seb up there receiving his award reminded me that trading does take many forms, and I was recently asked, by a newer member of our industry, to try and explain where logistical trading fits in to the LPG market. For me, as a bit of an old timer these days, physical and logistical trading is still pretty much the core of the LPG market, even with the much needed expansion of derivatives, used predominantly to support physical cargo movements anyway. I think the current generation entering the energy market are more likely to see the industry as this dematerialised, and speculative activity, centered on the flashing lights of the derivatives trading screens they see set up in lines, in groupings of four or six or more, on trading floor desks.

It does remind me of when I was sat in the office at SwissChemGas, looking across the trading table, and seeing more screens appearing on the individual desk of Othonas Serafetinidis, unfortunately we were keeping costs down and were not able to buy him one of those expensive monitor stands. But Otto wanted to build his wall of screens, and had utilized the annual stockroom supply of paper reams in achieving it, at least in this case being called our “paper” trader had more meaning to it than meets the eye!

For the physical LPG traders in today’s market, whether they are the independents such as Petredec, Geogas, Vilma and SwissChemGas, trading sections of the large publicly quoted and state oil and gas majors, such as Shell, Equinor, Total or EDF, or the LPG off-shoots of the huge commodity firms, such as Glencore, Trafigura, Vitol, Gunvor, they all face a highly competitive and dynamic environment, where one of the few constant aspects is “change” itself. Complexity of doing business is being increased by new regulation, the impact of competing fuels, new business models and the trade flows themselves, such as the start of LPG exports regularly and in increasing size from the U.S., or the growth of Indian imports and the close proximity to the Middle East, not to mention the impact of the China/ U.S. tariff war and sanctions effecting Iran export growth.

We’ve had the seaborne trade of LPG grow by well over 100% in the last ten years, we’ll see this grow further in the next five to ten years, as we will also see the global population continue to expand by over 40% by 2050, emerging middle classes striving for cleaner, more accessible fuels, continued industrialization and the requirements associated with it for the refinery, petrochemical and production businesses. LPG Traders are therefore going to have, if anything, an increased role to play, not only absorbing a lot of the risk associated with the modern LPG world, but also in developing the broader global infrastructure required to keep cargo moving, providing the best deals for both the producers and the consumers, and others along the way. As such they need to become even more sophisticated and agile, more aware of the impact of external factors on unforeseen circumstances that are changing the trade flows of LPG. The physical and logistical traders of today need above all else to expect the unexpected.

But what enables a physical and logistical trader to operate in the international LPG arena? I’ve always said that the most important factor is to have a “system”, a term easily banded around, but what does it actually mean. I think the first, and most important aspect is size. To get the financial benefits of logistics, the system needs to grow by certain magnitudes, depending on the size of company and it’s ambitions. A good example is Trafigura, who had until recently been characterized by regional plays, such as South America linked to U.S supplies. There’s also Equinor playing northern Europe against inflows of cargoes from the U.S. east coast and U.S Gulf, with movements out of the region to the Mediterranean or even further afield via the Suez Canal to India and China. But both companies are looking to make their trading international. Geogas are also a big regional trader, centering on key markets such as southern Europe, Caribbean, Australia and West Africa. They have also been strong in French speaking countries/regions.

The “system” is built up by taking contracts to deliver CFR, contracts to purchase FOB, ships on charter, owned and even chartered out or made part of a COA or pooling arrangement. Prior to the expansion of U.S. exports, this meant building a system around the Middle East to Asia trade, and this was primarily into Japan and Korea. Japanese importers were many in numbers, with FOB contracts scattered in relatively small volumes across the Middle East, usually with monthly lifting dates that didn’t match, owned ships that never met the loading dates, and import date requirements that never corresponded. The skill was to take on a number of importers as customers, take their ship, take their FOB cargoes, build up volumes and start your “system”.

There were always three financial reasons for having a system. Firstly, the hope is always to fix a contract on a CP plus freight deal into Japan, or Mont Belvieu plus freight into Ecuador, fix the FOB cargoes, fix the freight and lock in a margin. These deals just don’t exist anymore, if they ever did. When I was at Petredec we would start a year with contracts amounting to roughly 25% of the total volume we would end up trading physically by the end of that year. Doing the simple trading maths would nearly always result in an up front loss in the millions of dollars bracket. Secondly, by having a multitude of diverse positions covering different dates, different supply and receiving regions, meant that we could optimize deliveries, cut ballast legs, amalgamate cargoes, utilise tolerances and optionality in contracts, the list went on. Thirdly, by having a large system it enabled the trader to be in a position to take advantage of a potential spot seller, ship owner, charterer or buyer, especially if there was a degree of urgency involved. By having the system it meant you became one of the few who could physically meet the requirements of the deal, may be with a little pushing and shoving around of cargoes. Of course all of these required skilled operators, because downside potential from size was also there.

I know there is the simplicity to some extent of just trading price, via the derivative route, but physical system trading, or logistical trading, makes every challenge a new opportunity.