Higher PDH operations, winter demand stoke China LPG demand

China's end-year demand for propane, lasting through the new year, will be boosted by propane dehydrogenation plants ramping up operating rates after returning from maintenance and households heating up during a cold winter, trade sources said, keeping regional prices supported.

With all PDH plants resuming operations following maintenance, their average run rate in October rose over 18% from September, when turnarounds were at their peak, sources said. Many petrochemical factories also reduced operating rates over late September to mid-October due to power rationing, which resulted in lower polypropylene demand.

The increase in run rates shrugged aside persistent processing losses faced by Chinese PDH plant operators, and industry sources expect negative margins to continue due to weak PP demand.

Despite negative processing margins, many PDH plant operators must continue to maintain cash flow, sources added.

"I think as long as they are not in maintenance, their rate is not low... as long as they are running, it will be at 100% rate," one trade source said. However, some PDH plants such as Haiwei, Bohai, Zhejiang Petrochemical and Meide, cannot run at full nameplate capacity, according to data provided by JLC.

While power rationing affected PP demand, the source said: "It does not really impact much on PDH operations. So far, I did not hear negative margins having much impact on rates. The power cuts affected PP, but not much on PDH operations."

Traders said the recent dip in regional LPG prices is not expected to translate to additional spot cargo purchases, as many PDH operators have secured sufficient winter volumes.

Petrochemical maker Ningbo Huatai Shengfu Wealthy Polymer Material, which recently bought up to 69,000 mt of propane for end-November to early-December delivery, may be able to tolerate higher propane price as it cracks both ethane and propane. Ethane prices are comparatively lower.

Ningbo Huatai also has downstream cracking units to pass on the higher propane costs, traders said.

Steady LPG prices

CFR North Asia propane jumped to more than seven-year highs at $922/mt Oct. 19, before dipping to $850/mt Oct. 29, Platts data showed, as the market took a pause even as demand sentiment held firm. On Nov. 1, Platts assessed front-cycle H1 December CFR North Asia propane at $877/mt, underpinning a recovery in anticipation of winter demand.

Persistently firm sentiment was reflected in the latest November Saudi term Contract Prices for propane at $870/mt, the highest since February 2014, and butane CP set at $830/mt, the strongest since April 2014, Platts data showed.

China's LPG demand from residential users is expected to rise above an average of 2 million mt from a cold winter, an industry source said. "For example, in South China, winter demand could be 10%-20% higher than summer, while in East China, the ratio could be higher since East China's winter is colder."

Domestic LPG prices rose as high as Yuan 7,200/mt in the week ended Oct. 29 compared with early October, spurred by both an early and colder winter, sources said.

Yet, the price rise might have over-reflected actual demand growth, as LPG wholesale prices retreated to Yuan 6,000-6,300/mt over Oct. 25-29, an industry source in Shandong said.

Also, any increase in Chinese winter heating demand would be met by piped natural gas. State-run PetroChina will raise gas imports from Russia via the Power of Siberia pipeline to 43 Mcm/day by end-2021, from the current 28 Mcm/day, to meet higher demand during February's Winter Olympics.

PetroChina also signed an agreement with an unidentified oil and gas company in Central Asia to buy natural gas for October-March delivery via the China-Central Asia natural gas pipeline. Furthermore, China's pipeline gas imports from Myanmar are expected to rise this winter, as local gas distributor Yunnan Investment Qujing Gas signed a winter supply contract with PetroChina.

Households also use LPG for cooking, or water heaters.

China recently carried out market price reforms for coal-fired power. Top economic planner National Development and Reform Commission, or NDRC, expanded the fluctuation range of coal-fired power trading prices for non-residential users, allowing it to fluctuate by up to 20% from benchmark levels. Coal-fired power trading prices can even be raised by more than 20% for energy-intensive industries.

Power prices will be stable for residential and agricultural sectors. The move is aimed at improving the market-oriented mechanism for coal-fired power prices in an attempt to encourage power generation to meet winter-spring season power demand.

In view of this, industry sources said LPG demand for winter heating would be limited, with most requirements met by coal, natural gas and power.