Analysis: Japan to revive shrinking LPG imports on low stocks, refining output

Japan plans to revive LPG imports in the coming months to build inventories that dwindled over seven consecutive months, and to offset low refining output following weak demand during the state of emergency to contain the coronavirus pandemic, industry sources said.

The expected recovery in fuel demand over the July-August summer months after the sharp decline during the state of emergency over April 7-May 25, comes with the resumption of business and industrial activities as the spread of the virus is increasingly contained across the country.

Japan's domestic LPG production has been reduced significantly since April, when local refiners slashed crude throughput due to the plunge in demand for gasoline and other oil products. LPG production from domestic refining fell a third year on year to 118,000 mt in April -- the lowest for the month in at least more than two decades, according to data from the Japan LP Gas Association, or JLPGA.

The drop came as refiners cut throughput by 10.1% from March to 2.58 million b/d in April, Ministry of Economy, Trade and Industry data showed. The April crude throughput translates to 73.3% of Japan's installed capacity of 3.52 million b/d, down from 81.5% in March.

Japan's crude throughput fell further in May, prompting a deeper decline in LPG production during the month.

Crude throughput came in at just 1.82 million b/d over May 24-30, with the refining utilization rate having fallen to 51.8% of the total 3.5188 million b/d capacity, Petroleum Association of Japan data showed.

The LPG output slide has increased Japanese LPG importers' spot requirements, and imports are expected to increase after May, an industry source said.

But a Japanese trader showing caution said: "Although the lockdown has ended, LPG demand is still low as people's feelings are still [centered on] self-isolation, so I think we need time to recover, like one month or something."

LPG STOCKS SLIDE OVER SEVEN MONTHS

Total LPG stocks contracted 4.96% month on month to 1.263 million mt in April, down for the seventh consecutive month. Total stocks have been falling since hitting a high of 1.943 million mt in September 2019, JLPGA data showed.

Inventory rose 13.38% year on year in April, though slipped 14.2% versus April 2018, the data showed.

Based on the JLPGA data, the trader said this shows that Japanese stocks "look high," so importers and distributors can manage any emerging demand recovery, which he added would take a while to happen.

DECLINING IMPORTS

Trade sources said while the state of emergency could have boosted household LPG demand on increased home cooking, this was offset by lower usage of auto gas as well as in commercial and petrochemical sectors as business activities slowed.

In April, LPG demand for general use fell 17.37% month on month to 1.013 million mt and for petrochemical feedstock was up 133% to 28,000 mt, JLPGA data showed.

Total imports by Japan, the world's third-largest LPG importer, shrank almost 20% month on month in April to 832,000 mt -- the lowest so far this year -- and fell nearly 12.3% on the year, the data showed.

But traders pointed to data showing imports in March were 1.028 million mt, up 19.12% on the month and 59.1% higher on the year.

"So March [import] volumes are huge," another Japanese trader said.

Less bullish traders also said as long as the Saudi Aramco prompt month propane swaps structure remained in backwardation, Japanese importers would continue to be cautious on imports.

CP propane swaps have been in backwardation since March 26, and July/August was valued at a $1.5/mt backwardation on June 8, S&P Global Platts data showed.

However, with North Asian importers, including Japan, increasingly buying CFR Western cargoes, the focus is also on the Argus Far East Index propane prompt market structure, which has consistently been in contango in recent months due to healthy US LPG supply in this region. The FEI July/August propane swaps were in a $5/mt contango on June 8, Platts data showed.

In 2018, Japan's privately held LPG strategic petroleum reserves mandate was lowered for the first time since its introduction in 1981 after having raised in 2017 Japan's national SPR to 1.4 million mt, or 50 days of imports.

At the end of March 2020, Japan had 1.396 million mt, or 50.4 days, of LPG imports in its national SPR, and 1.425 million mt, or 50.4 days, of imports in privately held SPR, METI data showed.

Based on this, Japanese importers don't need to rush and buy, especially for the end-year winter season, which had previously triggered price spikes, trade sources said. Instead, they could better manage their import program according to demand, and prevailing international prices and supplies.

Corrects data source in paragraph 6