Escalating US-China row stokes fears of renewed US LPG import tariffs

Chinese LPG importers fear that mounting US-China tensions over Hong Kong could derail their nascent trade deal and reignite prohibitive import tariffs on oil and gas products, leading to costlier petrochemical feedstock, industry sources said.

Signaling that the Phase 1 US-China trade deal might be at risk, Chinese government officials were reported to have directed state-run agricultural firms to suspend some US farm goods imports.

This heightened jitters among Chinese importers that US energy products, including LPG, might again be included in future restrictive orders, three months after Beijing gave Chinese companies tariff exemptions to import US LPG.

"There is a concern that additional Chinese tariffs might be imposed again," a Chinese trade source said.

"This concern has started before the Hong Kong issue because there has been friction between both countries over the COVID-19 issue," he said, referring to counter-accusations over the coronavirus outbreak.

Tensions worsened after President Donald Trump slammed Beijing for imposing new national security legislation on Hong Kong, which critics say will crack down on dissent and upset the "one country, two systems" principle that has kept the financial center autonomous since the 1997 handover from Britain.

"I feel that the trade war might restart," said an LPG trader in Shanghai. "I think it's possible that energy products including LPG will be involved again in future."

A source with a major propane dehydrogenation plant operator said: "We should be prepared for the change of the US LPG import tariff exemption policy." He added they plan to apply for more US LPG import tariff exemptions before that change happens.

"If the applications are approved, the risk of tariff policy change is expected to be locked in for one year," a source with one of the LPG import terminals said.

China in early March began approving tariff exemption applications from Chinese buyers to resume imports of US LPG cargoes for March and April deliveries, after an 18-month hiatus. This was followed by June and July cargoes while applications for August are now open, trade sources said.

There are currently no restrictions on import volumes, while applications and approvals are valid for a year, said sources at import terminals.

Lower US LPG import costs have spurred purchases in recent months among Chinese PDH plants and LPG terminals, including Oriental Energy, Wanhua Chemical, Tianjin Bohai, Zhejiang Satellite, Dongguan Juzhengyuan and China Gas, market sources said.

Except for Oriental Energy, which has a long-term US LPG import contract, others are said to have bought spot US cargoes, sources added.

LPG IMPORTS

China imported 23,177 mt of US butane in March, customs data showed. China in April imported 251,702 mt of US LPG, versus none a year earlier, which accounted for 15% of the country's total LPG imports. As a result, US became China's third-largest supplier in April, customs data showed.

Imports of US LPG are set to rise further in May, market sources said. May shipments from the US to China doubled from April, accounting for a third of the country's total LPG imports in the month, shipping data from trade flow tracker Kpler showed.

Chinese buyers halted US LPG imports in August 2018 after the government imposed retaliatory tariffs on US imports, including propane and butane. This followed the US implementation of 25% tariffs on an additional $16 billion worth of Chinese imports from August 23 that year.

Chinese tariffs on US imports stand at 26% for propane and 28.5% for butane, according to China's Ministry of Finance, after China cut butane tariffs on February 14 by 2.5 percentage points from 31%.

"Import costs of US LPG are still competitive compared with barrels from other regions after the tariff exemption, though freight rates between the US and China have increased," another source in Shanghai said.

Chinese PDH operators including Oriental Energy and Wanhua Chemical had diversified supply over the past two years, in particular committing to long-term contracts with Middle East producers. Chinese buyers paid at least $10/mt more for Middle East spot cargoes above US LPG, trade sources said.

Other sources were Africa, the North Sea and Australia. Household suppliers such as China Gas can also look to Canadian LPG.

Even with current US sanctions, cheaper Iranian LPG still made its way to China, with trade sources saying four to nine cargoes were shipped monthly in recent months.

Chinese importers, especially PDH plant operators, fret they would again be reliant on costlier Middle Eastern cargoes if US imports were slapped with high tariffs.

Recently, FOB Middle East cargo prices were driven up by limited supply caused by OPEC+ producers' oil cuts, prompting Saudi Arabia to reduce term LPG supply, said the second source in Shanghai.

With cuts in Saudi propane supply for May and June loading, Saudi Aramco has raised its June propane contract price to $350/mt, up $10/mt versus May, though butane CP was reduced by $10/mt to $330/mt.

Saudi July propane CP swaps flipped to a $5/mt premium to the Argus Far East Index swaps on June 2, reflecting ample Western cargoes, led by US exports, compared to the relative tightness of FOB Middle East supply. While June/July CP propane swaps were in a $10/mt backwardation on June 2, June/July FEI swaps were in a $3.50/mt contango, S&P Global Platts data showed.