Traders debate merits of cancellations as US LPG arbitrage shuts on low Asia prices

Steep falls in Asian LPG prices over the past three weeks to near 20-year lows and a closed Western arbitrage to the East have prompted traders to debate the merits of cancelling US cargo movements, market sources said this week.

The FOB USGC propane cargo premium to Mont Belvieu cavern product typically sparks discussion of cancellations at minus 4 cents/gallon and US sources said they heard notional value at or below that level last week.

However, while some deemed the cancellation of propane cargoes imminent, no cancellations have been reported to date.

Discussion for split cargoes of butane and propane were heard at a premium of 6 cents/gal late last week, but the current market volatility was making it difficult to maintain any accurate assessment of propane values, with one source describing the market as a "moving target" and traders in the US Gulf Coast heard to be still working out the economics.

S&P Global Platts assessed CFR North Asia H2 April delivery cargoes down $1/mt day on day at $185/mt Tuesday, at the lowest level since the early 2000s.

The April/May CP propane swaps structure flipped to a contango of $3/mt Tuesday, the first time the front month market has dipped below the forward market since November 27 last year, Platts data showed. The May/June CP propane swaps was in a contango of $9/mt Tuesday, widening from $5.50/mt the day before.

Fog-related issues at the Houston Ship Channel resulted in loading delays earlier this month, which have not persisted. The Port of Houston reported 30 arrivals, 28 departures and three shifts for March 22, near average levels.

In addition, the Houston Ship Channel will remain open after Harris County in Texas was placed under a "Stay Home, Work Safe" order Tuesday until April 3.

CHINESE DEMAND COUNTERS AMPLE SUPPLY

In Asia, some traders said the market has already priced in bearish factors such as the increase in oil production from Saudi Arabia and other Middle Eastern producers, as well as the more supportive factors brought about by the resumption of imports by China after an extended lull due to coronavirus containment measures.

Other traders said the current price downtrend might not last as the resumption of Chinese imports -- at 1.5 million-1.6 million mt for April delivery -- could ramp up to 2 million mt for May delivery, exceeding the pre-coronavirus period in December, when 1.8 million mt was imported.

For May delivery, PDH operators such as Ningbo Haiyue have issued import tenders, while household gas distributor China Gas was heard to have bought a cargo from Spanish trader Repsol, traders said.

Three Chinese traders and PDH operators -- Wanhua Chemical, Petrochina and Oriental Energy -- bid for propane cargoes in the physical market for April and May deliveries Tuesday, illustrating the recovering Chinese appetite for LPG as industries return from mandated shutdowns.

Traders also noted that only 60% of US LPG volumes had been committed to term contracts in 2020, compared with 70% in 2019.

Because of this, US exporters were seen trading in spot cargoes, while the lower term volumes make them less inclined to cancel shipments. While terminal fees vary, Enterprise Product Partners charges 5 cents, while the cancellation fee is around 3.5 cents, making it unworthwhile to cancel.

In addition, as Chinese importers are given tariff exemptions to import US LPG, exporters will be keen to recapture the Chinese market that had been lost over the past year due to trade tensions and avoid cancellations, traders said.

But compounding the demand uncertainty, Tianjin Bohai Chemical will again delay the restart of its PDH plant that uses 720,000 mt/year of propane as feedstock to around March 29 from March 20, a company source said.

Outside of China, spot demand has yet to reemerge from India, which announced a 21-day nationwide lockdown Tuesday. No new spot demand has been seen lately from Indonesia either; it is usually a regular importer of LPG and has yet to impose a lockdown, but is stepping up coronavirus testing.