SIMON SAYS: Sun Rising in the East!

Submitted by Simon Hill on Sun, 10/11/2020 - 17:00
Sun Rising in the East!

The sun might rise each day everywhere in Asia, but it appears to be shining far greater over China than anywhere else, and it looks like this could well continue into 2021. The LPG market simply can’t ignore the impact of world economic growth, whether it’s individual countries, regions or continents, and when there’s a growing gap between the U.S. and Asia, then the writing’s going to be clearly on the wall! The world has been jolted by the effects of the coronavirus pandemic, and as the recovery begins, hesitant as it may be, there’s a clear indication that certain countries are managing it better than others. The OECD, in its recent forecast up to the end of 2021, has the U.S. just about getting back to the same size of the economy as it had in 2019, but China will be 10% bigger, and it’s all due to the way coronavirus has unfolded!

China’s where the disease originated, the first country to see the deadly effects of the virus, but it has emerged amazingly quickly, and if you believe the numbers, then take into account the ruthless lockdowns, coupled with the ability of the state to employ surveillance measures and controls, which other countries would grimace at, the result has meant the world believes China has it “under control”. Its economy has swiftly bounced-back! At the same time Europe is in a second wave of the virus, with state direction foggy and uncertain, while the U.S. appears to be at war, divided by politics, a President without immunity, whose fighting a further round of economic stimulus, but with the dawn of the early November election fast approaching. The quickly moving events of U.S. politics have also been mirrored in the country’s LPG market, okay not the world defining moments we have seen in Maryland nor at the White House, but the reaction to developments in Asia are quickly filtering through, and the spotlight is back on the LPG export terminals along the U.S. Gulf Coast. The uneven recovery of the world economy, the widening gap between China and the U.S, can only play into the hands of the traders, and my not so old favourite, the ARB!

But let’s start in Asia, the perceived hot bed of activity that’s apparently driving this market. Oil prices, especially Brent, have enjoyed a strong week, climbing 10% on the back of further hurricane shut-ins of around 1.5 MM Bbls/d in the Gulf of Mexico, another 1 MM Bbls/d lost due to strikes in the Norwegian sector as a result of worker’s pay claims, and more cautious news on production increases coming out of OPEC+. This meant Asian LPG prices jumped in the December forward market to their highest levels for six months, even surpassing the rise in Brent, with those ill-defining words “surged” and “soared” getting more print coverage than they probably deserve. But what is clear from last week is that a market that’s been screaming contango for a number of months, has now moved into backwardation. I admit that with China on their Golden week holidays the activity has been a little thin, but the traders are out there, sniffing that maybe a few importers are not as well covered as they might wish to portray in the poker games that dominate the market at this time of the year.

A 23,000 Mt propane cargo was reported to have been sold for first half November delivery at a couple of dollars premium on FEI, while the paper spreads ended the week firmly in positive territory, circling around the $5/ Mt premium up to the end of the year. Strength in the CP market also helps the cause in Asia, and November CP ended the week pushing above $410/ Mt, a jump of more than $35/Mt on October’s published level. Although propane is more the product of choice at this time of year, the shortage of butane export barrels out of the U.S., mainly owing to a 12 cents/ gallon premium for normal butane over propane in Mont Belvieu, making it uncompetitive to transport to Asia, has meant traders are again showing interest in split cargoes out of the Middle East. Although bids are still coming from the negative teens, sellers have gone positive with their numbers. But the global LPG market is not really going to be driven by events in the Middle East, even though there is still a few waiting for ADNOC acceptances. The focus is back on the U.S. market and what happens next.

The gap last week between the U.S. and Asia, where China is by far the biggest LPG importer, widened far faster than Joe Biden’s lead in the Presidential polls, and by Friday the ARB between Houston and Chiba was fidgeting around $160/ Mt, spreading $25/ Mt on the week. You’d think activity would be screeching ahead, keeping the brokers from London to Santa Barbara up all day and night, but the expectant bustle in the U.S. LPG export market, if anything, is somewhat lackluster. The last couple of months have shown export terminals to be happy reincarnating cancelled and deferred cargoes back into the re-sale market, but may be at the time they were not so happy with the fees they were facing, beginning with 3 and 4 cents/ gallon! But November appears to be different, yes, we’ve had a sell tender from an exporter this week, but they are now more of a rarity, and as a result re-sellers are able to wait without the likely competition from the terminals themselves. Resellers know the market for exports is potentially getting stronger, and if the volumes are limited then there should be more of the ARB pie to get hold-of, instead of seeing it end up in the laps of those normally hawkish ship owners. Re-sellers appeared to be waiting for the result of the tender, making it appear that there were no readily available November stems in the market, either early or late in the month.

I must admit I had expected to see a double digit bid win the tender cargo loading 6/7 November, but it appears the price was probably closer to 8.5 cents/ gallon, still a jump, but not yet a sign that the market is racing away, more ambling. The exporters are certainly busy, catching up on deferred cargoes from the summer, and still fearing further hurricane-led delays. As I write, Tropical Storm Delta has passed into Louisiana, with the Houston Ship Channel also closed, so further interruptions are on the way. Together with delays in passing through the Panama Canal in recent weeks, it’s these supply interruptions, coupled with static export availability, that’s causing concern in Asia, and that’s feeding the FEI numbers. Mont Belvieu prices are just ticking over after the weekly EIA inventory numbers showed nothing to write home about, given a tiny 100 M Bbls drop, so this is clearly Asian led demand pulling the ARB wider!

With all the upward direction in numbers related to last week’s ARB, there is a little surprise as to why the ship owners haven’t weighed-in as well. Rates for the Houston to Chiba run have stayed pretty much in the low to mid $90s/ Mt range, albeit they are returning nearly $1.5 million per month to ship owners, normally looking for break-even at $750-800,000 monthly time charter equivalents. Are they happy with their lot? Of course not, they just haven’t been able to move. Cargoes are there, but the combination of limited additional slots, as well as re-sellers in waiting mode, has kept a lid on rates, but have no fear the $100/ Mt may well get broken again in the next few weeks, especially as ships still have delayed special surveys to do and ship owners hate to miss a trick or an extra dollar, or ten, on the rates!

Whatever you do this weekend remember that China looks as if it’s stolen a big march on the U.S. and others in the road to economic recovery. I’ll leave it at that!