Last night the January 2020 ARB was floating at just under $230/ Mt, the difference between the propane price in Asia and the price in Mont Belvieu. Freight has slipped to circa $115/Mt for the Houston to Chiba voyage via the Panama Canal, making up only half of the overall differential. Now I don’t think that’s been the case for a while, even when freight rates from Houston to Chiba had slipped to just above $40/ Mt a couple or so years ago. I think someone said this was “helping netbacks”, how much help do they need!
I know I’m sounding like a broken record these days, but the market keeps pointing the finger at capacity constraints at the export terminals along the Texas coast, especially all that hullabaloo over an additional 175 M Bbls/d of loading capacity at Enterprise, supposedly coming on in the third quarter. Yes there appears to be an acceleration in loading rates, but it hasn’t, it seems, translated into the circa 450,000 Mt per month, which handily divides into 10 ships for the same period. We’ve about exhausted ourselves going through the logic. The fact that winter exports are propane weighted out of the U.S. Gulf, yet the exports of propane, as measured both weekly and monthly by the EIA, have only moved up by 100 M Bbls/d, from 1,100 to 1,200 M Bbls/d, and during that time P66 were already able to knock out a couple of extra cargoes per month, making up nearly a quarter of the increase. So does the ARB become irrelevant when we are in this situation? Clearly it’s not having the desired effect of sucking out more exports, and that would be worrying for the market at any time, but even more so when the expectation of more exports has been set firmly in the minds of the industry, and especially those who were considering building new terminals!
I’ve always looked at the freight market to determine activity levels, and especially exports out of the U.S. Gulf. We are quickly approaching the IMO 2020 chimes that will start to ring the minute the clock passes midnight on 31st December, and around 5-10% of the VLGC fleet are preparing for their SOx-scrubber fitment, although it appears 20 VLGCs could wait until the first quarter of 2020. In the meantime, all other VLGCs will have to clean their tanks in preparation for compliant low Sulphur fuels. Now ship owners are a canny lot, and they will put off the day of reckoning as long as they can, especially when rates are at record levels. So maybe I can accept that this is another area where the hullabaloo has been greater than the reality of the market. Now there is of course another counter argument that ship owners have been ballasting vessels west, looking to enjoy the benefits of the premiums they can earn over loadings out of the Middle East, so we might be seeing an overhang suddenly appearing.
I also think this is a classic timing dynamic. We’re blue in the face saying that the main exporters are struggling to ramp up their export volumes, unable to free up more slots, loading other planned cargoes faster than they were previously able to, as a result of beefing up their chiller units. So this leaves the bulk of cargoes in the hands of the contract holders, some with their own ships, but a lot totally relying on the spot market for coverage. A few weeks ago we were saying how lifters and owners alike had fixed ahead of the normal timing cycle, with traders fearful of higher freight levels, while ship owners were happy to nudge levels up, and at the same time get their VLGCs fixed out, at these record numbers, for another couple of months. I think we are seeing the reverse of this now. Higher rates brought more VLGCs heading west, but the lifters were more relaxed, so freight levels got stuck in the mid-$125s/ Mt, and weren’t getting out of hand, while the ARB just kept getting wider and wider. If I was lucky enough to be holding a cargo of propane at one of the U.S. Gulf loading terminals, clearly seeing the netbacks zooming through double figures, to today’s levels sitting well above 20 cents/ gallon, I would be offering my ship out as a re-let, and looking to sell my stem FOB, or hold onto it a little longer before deciding. As a result cargoes normally available on the FOB market are being held back, making supply opportunities appear to be limited (but the cargoes are still there), driving up terminal re-sale fees to levels not seen for well over four years. With those lifters who have ships trying to sneak in a voyage re-let, and undercutting the mainstream ship owners, the freight market has come under pressure, because cargo sellers are holding their cards closer to their chest. This is trading!
At the same time, the winter in the U.S. is following the normal curve, the panics of recent weeks, especially getting hold of supply, appears to have dwindled, both weather-wise and for crop drying. But the EIA numbers are driving the market. Production levels are up dramatically when averaged over the last two weeks, inventory levels have increased significantly this week, and even taking the average of the last two weeks, it’s still coming out as a build. Exports are yo-yoing, but the average is not as high as a lot of commentators thought would be the case, so nothing to get excited about, and again it points to a build up of inventory. All these factors will normally push the producer or trader, who hold barrels, to start believing it is time to offload, and this starts to push the market down in Mont Belvieu. It’s a classic situation where the cork has pretty much got stuck in the bottle, and there’s no extra coming out, even though there’s a lot still being produced. The buyers in Asia are therefore getting nervous, they’ve seen the news on OPEC, the lack of additional availability in the Middle East, and now the U.S. looks as if its got its hands tied, exacerbated by the holders of cargo slots reluctant to give them up, especially with their own system demands to meet, but also with the prices going up. Oh yes, there’s also the festive season to think about, not just Christmas, but also the Chinese New Year demand starting to register for the next bout of shipment arrival windows in Asia.
So maybe the ARB just keeps going, the prices in Asia will still have to try and encourage other cargoes to move east, which will have to be from Europe and Algeria. A few west coast Africa cargoes appeared last week, but although they are new spot sales, they are always penciled in for Asia anyway. Whatever happens they are unlikely to be enough. What Asia doesn’t need now is any sort of sub average cold weather appearing, or we might all need a few swigs of Saki to keep going!