About 12 Asia-bound US LPG cargoes loading February-March canceled on shut arbitrage

Up to eight LPG cargoes for loading in the US in February were canceled due to the closed Western arbitrage to Asia, where prices slid to three-week lows around mid January as demand for winter heating eased and market activity paused for Lunar New Year festivities, trade sources said over the past week.

At least another four cargoes slated for loading in March were also heard to have been canceled, with a few more cancellations expected, the sources said.

Delays that vessels face transiting the Panama Canal, ranging between 15 days north and 10 days south, as well as high fees that shippers had to pay to ensure lots for prompt passage, also persuaded traders with US cargoes to consider cancellations, sources said.

One Japanese trader was heard to have paid just over $500,000 to secure a slot, market sources said.

"It's just bad arbs due to limited demand, mostly in Asia... compounded by Panama Canal [delays] and robust Mont Belvieu [propane], which is pushed by weather and crude," said one US-based source, referring to the declining arbitrage values.

S&P Global Platts assessed non-LST propane, reflecting barrels at the Enterprise NGLs storage and fractionation facility in Mont Belvieu, Texas, up 12.5 points at $1.275/gal Feb. 4. Spot propane reached $1.32125/gal Feb. 2, the highest level in 12 weeks.

NYMEX March West Texas Intermediate settled $2.04 higher at $92.31/b Feb. 4, the highest front-month settle since Sept. 29, 2014.

Strong US LPG

The US Northeast faced a significant winter storm in the Jan. 31 week, which impacted gasoline prices and boosted spot LPG prices on the USGC.

In contrast, CFR North Asia propane fell to $751.5/mt Jan. 19, the lowest since hitting $750.5/mt Dec. 29, before recovering to $799/mt Feb. 4, Platts data showed.

CFR North Asia butane dropped to $667.5/mt Dec. 21, the weakest level since touching $649/mt Dec. 3, 2021, before rebounding to $811/mt Feb. 4, Platts data showed.

With the extended decline in VLGC rates and the anticipated return of Chinese and Indian demand in March, some sources hoped the arbitrage could reopen soon and that there might be fewer cargo cancellations ahead. "Sure could. And will," one Western trader said, when asked if the arbitrage could reopen.

But others were more cautious. "[It's] hopeful thinking for March. We'll have to wait for April," the US source said. Another Asia-based source said even that remained uncertain.

VLGC rates declined on the US Gulf Coast again Feb. 4, with Houston-Chiba shedding $5/mt to $95/mt and Houston-Flushing down $2/mt at $50/mt. Freight to Japan has declined $24/mt from Jan. 13, and is below $100/mt for the first time since Nov. 5, 2021, when Platts assessed Houston-Chiba freight at $96/mt.

Houston-Flushing freight was last lower at $48/mt Nov. 1, 2021.

Rates on the Ras Tanura-to-Chiba route are falling towards $47/mt this week to match the lowest last seen level Oct. 27, 2021, Platts data showed.

In canceling a term cargo, a company opts to pay a cancellation fee rather than lift the product to sell in a weak market. That fee can be as much two-thirds the cost of lifting, traders said.

For example, if the contracted lifting fee is 12 cents/gallon and assuming the cancellation fee is 8 cents/gallon, the latter is a sunk cost. One can either pay the 8 cents/gallon by cancelling, or lose 8 cents/gallon to sell the cargo.

Either way, the company loses 8 cents/gallon. If the company cannot sell the cargo at or above 4 cents/gallon, it is losing more than if it were to just cancel it.

The cost of lifting is a contracted price between two companies, that is the terminal and the lifter, and is often in effect for five to 10 years. The cancellation fee is established when signing the long-term contract that sets the lifting fee and could be as much as 75% of the lifting cost.

Spot terminal fee, or waterborne premium, is the price of a resale cargo in the spot market. This would be the going price if a party with a contract to lift barrels of LPG were to resell that cargo.

In May 2021, nine to 10 Eastbound LPG cargoes that were due to load last June from the US were canceled due to a shut arbitrage as Asian prices weakened and VLGC rates strengthened.