As the people of China celebrate Chinese New Year this weekend, and where the common greeting literally translates to “wishing you enlarge your wealth”, the world will be looking in eager expectation at China’s economy, wondering if its 2021 performance will be as strong as an “ox”, and how that will also impact the LPG market, as well as the patterns of trade associated with the world’s biggest LPG importer.
A couple of weeks ago China released its gross domestic product (GDP) data showing an expansion of 6.5% in the 4th Quarter of 2020, beating forecasts, and helping make China one of the few countries globally to record positive growth for the whole year, highlighting the exceptionally speedy turnaround of the world’s second biggest economy. Okay, it was still the weakest full-year GDP growth in 40 years, but in relative terms it’s super-impressive. The power-house has been higher industrial production, while retail sales have loitered a small distance behind, coinciding with inflation at 10 year lows. The trade surplus for December also came in at record levels, adding to an array of data suggesting a booming economy. Forecasters are sharpening their pencils, with numbers above 7% GDP growth being scribbled on the back of their takeaway dim-sum menus. The only fear is coronavirus, which in January saw the first death caused by the disease since April, but China seems to have a way of controlling such problems!
So with all this positive news flying around, why was China the probable catalyst for the recent fall in Asia’s LPG values, that begun just after our western New Year? I think China’s decade-low inflation numbers were part of the cause, as importers, wholesalers and retailers failed to pass through all of the massive jumps in the FEI price, coupled with stronger premiums, a result of one of the coldest snaps of winter in nearly seven years in northern Asia. Renminbi prices ex-storage/refinery in China slipped below the equivalent dollar import levels, limiting buying demand, and pushing a strong signal to the market, especially at a time when weather forecasts were shifting to milder temperatures.
In addition, China’s propane Dehydrogenation (PDH) plants had been enjoying operating margins above $200/ Mt at the end of 2020, only to see them slip below $50/ Mt by the new year, as propane prices accelerated, while Chinese propylene prices failed to breach the $1,000/ Mt level. Buying interest for propane evaporated, or got delayed, as did a couple of start-ups planned for the first quarter. The buying might of the Chinese LPG market had gone relatively quiet, and with Mont Belvieu propane accelerating on the back of higher crude oil prices, record propane exports, seasonally low inventories, and cold weather on the way, the ARB, as you know, took a hell of a beating, with even the freight market unable to stem the fall.
Whatever you’re feeling is about the direction of the ARB over the remainder of 2021, Chinese buyers are still going to be calling a lot of the shots, and they know it. With Japanese import volumes down in 2020, Indian and Indonesian growth rates slipping, you’d be a brave person to bet against them. But as always, it’s not quite as easy as that, with the landscape being a little more complex than we would expect.
With a strong economic growth performance comes increased domestic demand for LPG, and I’m expecting that to move above 65 million Mt in 2021, but don’t take it for granted that this increased demand will be fueled by imports. November and December’s refinery output was at monthly records, with refinery runs up 3% on the year, not telling the full story of the jump in running rates skewed to the end of 2020, and due to continue this year. Again this is a contributory factor in putting a lid on Chinese domestic LPG prices. In addition, China’s domestic crude oil production unexpectedly gained 1.6% in 2020, reaching just under 4 million Bbls/d, yes it’s marginal in the big picture, but it showed China’s determination to reduce its reliance on imports. Natural Gas output was just under 15% higher this December compared to the last, mainly to meet surging heating demand as the cold weather gripped a lot of the country, but also as part of the longer term plan to reduce carbon emissions. For 2020 overall, natural gas output was up 10% on 2019, also increasing domestic LPG production, as the China shale boom continues to develop. Even though China probably has more shale derived oil and gas than the U.S., it’s far more costly and difficult to extract, but China is determined to move forward, despite what appears to be considerable challenges. However, the big difference to the U.S., is that China will continue to subsidize the programme, with state operator CNOOC recently announcing a record capital investment budget, as China drives forward to achieve their 5 year development plan targets.
China has also reached the next stage of its huge investment plan for their domestic petrochemical sector, further accelerating self-sufficiency, or domestic circulation (supply chains) as it is otherwise known, and therefore becoming less dependent on petrochemical derivative imports. This certainly means the demise of ethylene and propylene imports, shifting more to feedstocks such as, ethane, naphtha and propane. But the plan is for integrated refineries to step up to the mark and supply more naphtha and light ends, backed up by more local oil and gas production. It’s just a matter of time. So, don’t get too excited about the impressive growth of China’s PDH sector. The ultimate aim will be to use increasing amounts of propane produced from domestic shale developments, but don’t worry its impact will only be marginal in 2021. The market’s still expecting new PDH plant start-ups and ethylene crackers to consume nearly 3.5 million Mts of primarily propane imports in 2021, helping to keep the Arb open.
China’s relationship with the U.S. is still a major question mark, especially under the new Biden presidency, and although a lot of the direction taken by the Trump administration will remain, you sense the two governments will need to sit down and talk. Trade wars look less likely, making the importation of U.S. propane to cover increased Chinese PDH demand in 2021, a likely shoe-in. Therefore despite increased freight costs associated with the longer voyage distances from the U.S., in comparison to Chiba Japan, the major tug-of-war on the LPG side will be determined by how easy it will be for Chinese buyers to meet their requirements? Will the ARB be driven by the need to keep it open to maintain U.S. exports, or what alternatives do the Chinese buyers actually have?
As the LPG players around China tuck-in to their new year delicacies, I always liked the Nian Gao and San Choy Bow from my days in Singapore, the unknown factor in 2021 will of course be China’s ambitions with regards Iranian LPG imports. If President Biden does ease sanctions, then expect the flow of LPG to move more openly to China. Volume wise, it could be 3-4 million Mt extra in time, the same as China recently imported from the US pre, and post, the trade war. As we all wish for wealth and prosperity in 2021, keep an eye on Chinese LPG imports, they’ll be playing a sizeable role in the strength of the ARB, and the flow of exports from the U.S., Gong Xi Fa Cai!