Algerian state-owned Sonatrach's LPG term supply contract with Chinese petrochemical giant Wanhua Chemical marks a significant turning point for the country's LPG outflows to Asia but, trade sources said they have yet to be convinced whether Sonatrach's aim to widen the adoption of its own contract price will take off amid a landscape dominated by Saudi Aramco and Argus Far East Index contract prices.
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"We are not in a position to disclose more details on the deal, but Wanhua and Sonatrach have established a wide-ranging cooperation and will explore more business together, LPG is part of that," a Wanhua official said.
The landmark agreement, announced May 16, will enable Sonatrach to ensure regular LPG supply to Asia and increase the adoption of its own contract prices.
The Wanhua official was responding to queries from S&P Global on details of the monthly and yearly LPG volumes under the supply contract.
In its statement, Sonatrach said: "The contract concerns regular supply of the Asian market with Algerian LPG, marking a significant turning point for Algerian LPG exports, also allowing the introduction of the Algerian LPG price reference on the world's largest regional LPG market."
"Through this agreement, the two companies confirm their desire to establish a lasting and fruitful commercial relationship in the field of LPG and petrochemicals in general," it added.
Evolving price markers
Trade sources said the contract's pricing was likely based on Sonatrach's prices for FOB shipments.
A Western trade source said whenever Sonatrach has a surplus, they would ask buyers to take it outside the region and sell at discounts.
Sonatrach typically sells on a netback basis, usually below its prices, the trade source said, adding that in the case of a CFR netback, the discount may not be huge.
Saudi Aramco sells via affiliate Aramco Trading Co on a CFR rather than FOB basis, and Sonatrach may be trying to leverage this and become the price maker, the trade source said.
ATC sells about 10% of its CFR cargoes on FEI basis and the rest on Saudi CP basis, other market sources said. The trade source said that while the CP remains dominant, use of other markers might make Aramco lose some pricing traction.
However, Sonatrach's system was less transparent and a smaller business, making for a small paper market for hedging, while Algeria's prices were often restricted by inclement weather delaying shipments, the trade source added.
"I do not see this becoming a viable option," the Western source said. "They are too small to become a price maker for the rest of the region."
A North Asian source said: "I don't think this would affect much of the use of Sonatrach's prices in the East of Suez. I think export volumes from Bethioua are around 7 million to 8 million mt/year."
"We've seen a maximum four cargoes/month coming to the East these days. I'm not really convinced this flow would change the pricing power balance in the East. It really depends on the [contract] volume."
Sonatrach caters mainly to LPG demand in the Mediterranean and exports on spot and contract basis to Northwest Europe and the Americas. Some spot volumes are sold to Asia via traders.
Propane from Bethioua, a major hub for Algerian LPG exports, was included in Japanese brokerage Ginga Petroleum's forward contract terms, but butane was not. This allows propane lots to be bid, offered and traded in the Ginga Asia daily physical window.
Algerian monthly LPG exports to Asia have fluctuated over 2014-2022, averaging 678,890 mt, Kpler shipping data showed. But shipments rose 265% on the year to 1.23 million mt in 2022.
Volumes have reached 468,000 mt so far in 2023, equaling 2021's total. Exports in May were projected to touch 189,000 mt, the highest since July 2022. Algeria's LPG exports averaged 6.38 million mt/year over 2014-2022.
China's imports of Algerian LPG rose 16.6% on the year to 75,000 mt over January-April, making the North African producer the ninth-biggest exporter to the world's top LPG importer, Chinese customs data showed.
Shanghai-listed Wanhua's deal with Sonatrach came after the former brought onstream the world's first steam cracker using almost 100% LPG as feedstock in November 2020. Wanhua also operates a 750,000 mt/year propane dehydrogenation plant in Yantai, Shandong province, which also uses butane as feedstock.
The Sonatrach contract underscores Wanhua's drive to diversify supply to secure the best prices and volumes and the Chinese petrochemical maker is negotiating term renewals with US and Middle East-based suppliers, sources said.
Algeria has exported 2.57 million mt so far in 2023, with nearly 78% heading to the Mediterranean and 16% set to land in Asia, Kpler data showed.
Algerian exports in May stand at 446,000 mt, with shipments to the Mediterranean totaling 245,000 mt and volumes to Southeast Asia at 139,000 mt, up from 47,000 mt in April, Kpler data showed.
Algerian LPG loadings were between 500,000 mt and 600,000 mt in April, S&P Global data showed. So far in May, volumes stand at 232,000 mt and are likely to rise further, S&P Global analysts said.