It feels as if the political baton has been passed over the Atlantic, with the announcement yesterday that the Democrats had won the vote in the House of Representatives to impeach President Trump. As we in the U.K. had to go through the embarrassment, and the peculiarities of the House of Commons rules and procedures, as one side favouring remain, representing different parties but not always their constituents, out-voted a Government aiming to put in place what they described as the vote of the people to leave the European Union. Political deadlock ensued as the only recourse was to the national ballot box , and a General Election. Now, rather than London, it appears Washington D.C. will pretty much go through the same hoops and hurdles to determine whether President Trump is guilty as charged. And again, the final result will be made by the people in an election. Whatever side of the fence you sit, it’ll be exciting times ahead in 2020, and the impact on the U.S./ China trade talks, coupled with the next move on Iran, will be interesting to see as the impeachment trial rolls out, the U.S. election campaigns roll out, and the incumbent, or someone else, maybe a Democrat, maybe a new Republican, becomes the White House resident.
LPG’s future in 2020 is all going to be about supply, where LPG demand has to respond, not the other way around. Demand has to analyse and predict future volumes, and forecast the impact it will have on prices. “It’s all going to be about supply” has become an adopted industry mantra, and 2020 and beyond looks as if it will all be the same again.
Looking ahead, it’s pretty simple to predict the predictable. I’ve said don’t be surprised to see a high single figure, in millions of Mt, for exports out of the U.S., mainly from the Texas Gulf coast. There will be pockets of new domestic U.S. demand, whether it is the growth of the PDHs or maybe Autogas, but overall U.S. demand will struggle to keep pace with the extra production still coming on-line. Latin America will pretty much sit still, although we will see some recovery of demand if prices remain low enough compared to crude oil, and the close proximity/ pricing basis can only favour cargoes moving from the U.S. But the Latin American economies are not doing well enough to add momentum, so there’s nothing to get over excited about.
I would love to see advances being made in Sub-Saharan Africa, and without doubt progress is happening just at the right time, especially given U.S. exports, but Africa is still something of a sleeping giant. The African east coast papers have plenty of stories related to LPG, but they are more interested in the wrong doings than the right choices being made. I’m very happy for my nephew, especially the hard work he has put in to getting the South African LPG terminal off the ground for Petredec and their partners. As I have explained before, the business mentality has to be focused on building larger receiving terminals, to ensure supply for the local market, and to reduce the premiums associated with supplying smaller lots. I keep reminding people that Sub-Saharan Africa will be larger in population than either India or China by 2025, and it needs to harness the considerable benefits of LPG as a safe, portable and clean fuel, even though there will continue to be larger opposition to “fossil’ fuels generally around the world. I would love to be saying that Nigeria is about to embark on the roll-out of subsidized LPG and cookers, in order to move the population away from other fuels being used, normally at inflated prices aimed at benefitting the few rather than the majority. The product is there, the will and the political support in any implementation is needed. Again, it’s unlikely to happen in 2020, or even by 2025, but let’s keep our fingers crossed.
Europe will again be the fulcrum of the market at the margin, where it will absorb about half of the U.S. east coast export volumes, mainly into the petrochemical feedstock sector. But it’s not what it absorbs that will prove of interest to the market. The swings in supply/ demand will throw up opportunities again for cargoes to move out of Europe, not just the cargoes from the north entering the Mediterranean, but moving to Asia through the Suez Canal. Algeria will also play a similar role. Europe is the area that will find disequilibrium the quickest, and will therefore have to react by reducing over-supply. It’s more likely to be an over-supply situation, as the natural instinct is to look first to Europe with any cargoes from Marcus Hook. Having said that, Marcus Hook to Asia is not out of the question.
So this brings me to Asia, from Pakistan to Japan. The relationships with the Middle East will continue, and the proximity of India makes the trade route an easy one to take. It should get easier if the U.S. / China trade discussions progress, especially on the LPG front, but as we started to say, there’s a lot that might or might not happen in the corridors of power in the U.S., and certainly for the early part of the year, expect a stalemate. China, if unleashed from the tariff constraints it finds itself under, will always load where LPG lands back in China the cheapest. So the logistical advantage of China’s proximity to the Middle East compared to the U.S., should draw China closer to Middle East producers, but India will happily keep paying Saudi Aramco CP, and a lot of that is to do with keeping China out. As freight levels move up, the Chinese buyers will also face extra costs bringing in U.S. cargoes, if tariffs are lifted. I think we will therefore continue to see Japanese importers swapping out Middle East cargoes in exchange for taking in U.S. origin product. It makes sense logistically, but the market would work better if this constraint wasn’t there. If I have a worry, it’s Indonesia. I see that spot buying is a necessity when the term premiums appear to be too high, but this is a country in need of logistical solutions, and good trading partners can bring this.
The ARB looks as if it will be open for the whole year, given the production forecasts, capacity increases in fractionation and export capability. But we’re bound to have a surprise somewhere, and maybe there are greater issues still to surface in the shale regions, but I can’t see demand surging, and exports will therefore have to keep flowing. The freight market is simple, more exports than ships means only one thing for me. Yes, we might see dislocation moving ships to the wrong place at the wrong time, but I still believe we are 20% down on the number of ships we will need in 2020 to pull the rates back to the equilibrium that covers OPEX and CAPEX, circa $800,000 per month time charter equivalents. So in the meantime, expect the ARB to remain open and freight to again regain the upper hand over terminal fees.
For me, 2020 means “flexibility” and that means ships! There’ll be loads of product around and the agility to be flexible in deal making, both physically and on the paper market, will pay dividends. Oh yes, keep an eye on Enterprise’s expansion, their plans are big for 2020 as well!