US LPG arrivals to Asia seen steady for March, slow demand raises cancellation concerns

Singapore — US LPG arrivals to Asia are estimated at 1.8 million-2.0 million mt in March, steady from February, although some traders fretted over cancellation risks in the coming month given falling prices if demand slowed further.

In January, about 2.3 million-2.5 million mt of US cargoes arrived in Asia, while February arrivals were around 2.2 million-2.3 million mt, industry sources told S&P Global Platts.

There is no risk of cancellations at the moment given that the FOB Month Belvieu arbitrage spread is at 9 cents/gal. But lifters generally start considering cancellations when the spread narrows to 4 cents/gal or lower.

But the ongoing coronavirus outbreak in China has fueled concerns over demand in the region, pressuring delivered propane prices to near four-month lows. Last week, H1 March CFR North Asia physical propane assessments fell to $348.50/mt, the lowest in more than four months, Platts data showed. It recovered to $367.50/mt on Monday.

In the US, non-LST propane shed 1 cent/gal to 37 cents/gal following three consecutive day-on-day gains, while non-LST normal butane fell a further 5.625 cents/gal to 58.875/gal, its lowest since October 24, 2019.

US cargo cancellations had been high in 2018, from around three to five cargoes in the February-loading program to up to seven to 10 shipments in March that year, as the arbitrage was crunched by stubbornly weak Asian values.

Sluggish LPG demand in China currently, amid expected falls in propane dehydration plants' operating rates, have pressured prices lower, trade sources said.

These lower prices in the East could make US arbitrage flows less economical and prompt cancellations, market sources said.

"Expected numbers [March delivery] is likely to shrink with the current compressed arbitrage economic," a ship broker said.

"US FOB prices are rapidly moving towards canceling territory, " the source added.

Some market sources however said most of the February loading cargoes from the US -- which would translate as March arrival for Asia -- were already booked. If there were to be any cancellations as a result of poor Chinese demand, it would be seen only for April-delivery cargoes.

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 as 75% of the cost of lifting. Assuming lifting fees are 12 cents/gal, as some sources have estimated, a cancellation fee would be about 8 cents/gal, meaning a company with a similar contract might opt to cancel if spot terminal fees fall below 4 cents/gal.

SLUGGISH ASIAN DEMAND

LPG demand from Asia is expected to be sluggish over the next two months, which could potentially lead to cancellation of US exports in the coming months, traders said.

While demand from China is already on a downtrend amid the coronavirus outbreak, demand from other Asian buyers including Indonesia and Japan are also thin, traders said.

"The winter in Japan is relatively warm, so base demand is a bit low," a Japanese trading source said.

Moreover, with end of winter in Japan, seasonal demand would drop further, pressuring imports, traders said.

Indonesia's Pertamina has yet to issue a tender seeking LPG cargoes for February delivery, traders said.

Pertamina last issued a tender in January, seeking two 44,000-45,000 mt of evenly split cargoes for February 13-17 delivery, the results of which were not immediately known.

Demand from India, one of the biggest importers of LPG, is expected to hold steady in the coming months, market sources in India said.