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China's LPG demand to grow, albeit at a slower pace

China's LPG demand is expected to continue its positive growth momentum in 2018 but the growth rate is expected to slow because of policy uncertainties that could cast a shadow over the petrochemical sector's demand outlook, analysts and market sources said.

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LPG demand is estimated to grow around 7% in 2018, slowing from a growth rate of around 9% in 2017, according to analysts and market sources.

Meanwhile, there are uncertainties surrounding the start of new propane dehydrogenation plants, the implementation of E10 gasoline, and demand outlook from alkylation units.

In 2017, apparent demand for LPG -- comprising domestic production and net imports -- was around 49.31 million mt in January-November, up 9%from around 45.37 million mt in the same period the previous year, according to S&P Global Platts calculations based on data from the General Administration of Customs and the National Bureau of Statistics.

December volumes are still unavailable, but they are not expected to significantly alter the overall growth rate for 2017. That would mean the growth rate for LPG demand would fall to a single digit in 2017 for the first time -- after four consecutive years of double-digit growth since 2013.

China's LPG demand from the industrial sector is expected to be driven by the government's policy encouraging the use of gas for heating instead of burning coal, as Beijing steps up efforts to combat air pollution. This policy initiative has boosted gas demand, causing supply shortages in some areas.

In northern and eastern China, some industrial users saw their gas supplies either reduced or suspended as the government had to ensure supply for residential users. As a result, some factories which are using natural gas as feedstock are adding LPG-fired units to ensure normal operations.

"Although Beijing has allowed some northern cities to use coal in a temporary policy U-turn and LNG prices have also fallen recently, the government's policy of shifting to using gas for heating instead of burning coal will inevitably continue to drive up domestic demand for natural gas," said a LPG trader in eastern China.

"For burning, LPG is also a cleaner alternative to coal and can replace natural gas as feedstock for some factories. When natural gas supplies are not sufficient or the price is too high, LPG will be a good choice for them," the trader noted.

China's natural gas city-gate price is regulated by the government, while the price of imported LNG is determined by market forces.


LPG demand from PDH plants is expected to grow further in 2018, albeit at a slower pace, said market sources.

"PDH plants have been running at high rates in 2017, driven by profitable processing margins. They are expected to keep operation rates high in 2018 if processing margins are not too bad," one Oriental Energy source said.

In 2017, PDH plants' processing margins mostly stayed above Yuan 1,000/mt, except in April and in the fourth quarter, Platts calculationsshowed.

"The 500,000 mt/year Hebei Haiwei is expected to raise its run rate after one year of operation," the source noted, but added that they were considering shutting for around 20-30 days of major maintenance in 2018 as they did not shut for any major maintenance in 2017.

Oriental Energy currently runs two PDH plants in China -- the 600,000 mt/year Zhangjiagang Yangzijiang Petrochemical in eastern Jiangsu province and the 660,000 mt/year Ningbo Fuji Petrochemical in eastern Zhejiang province -- with operation rates averaging around 88% and 82%, respectively, in 2017, according to data from China energy information provider SCI.

Besides, China's Fujian Meide Petrochemical, a wholly-owned subsidiary of China Flexible Packing Group, has not started up its newly built PDH plant in southeastern Fujian province. The plant, which completed construction in 2016, has a propylene production capacity of 660,000
mt/year and can use up to 790,000 mt/year of propane as feedstock.

"Meide is believed to have postponed the start date as its dock has not passed the government's examination and approval process," a third sourcein east China said. "If Meide's PDH plant starts operation in 2018, it will surely add to LPG demand."

China currently has eight PDH plants with a combined propylene production capacity of 4.61 million mt/year, and can use up to 5.53 million mt/year of propane as feedstock at full operating rates.


Demand from mixed alkane dehydrogenation plants is expected to grow further as new plants that started operations in late 2017 are due to ramp up output in 2018, sources said.

Dongming Petrochemical's 95,000 mt/year mixed alkane dehydrogenation plant in eastern Shandong province started operations in July 2017 and is expected to use more LPG feedstock in 2018.

Besides, Jinling Huntsman New Material, a joint venture between Huntsman and Sinopec, which started its propylene oxide /MTBE plant in Jiangsu in July 2017, is expected to consume more LPG in 2018 as well.

However, China is also promoting the use of E10 gasoline containing 10% ethanol, which would affect demand for MTBE, and thus affect MTBE plants'demand for LPG as feedstock, a source in eastern China said.

MTBE is currently one of the major blending components in gasoline, with around 10% added to refinery produced gasoline to increase its octanenumber.

Should E10 become mandatory, ethanol will replace MTBE as a blendstock in the future, the source noted.

China's apparent demand for MTBE is estimated at around 11.47 million mt in 2016. The promotion of E10 will inevitably weigh on MTBE demand, which in turn will affect demand for LPG, the source added.

Still, Sinopec is scheduled to add alkylation units with a total capacity of 3 million mt/year at its refineries over 2018-2019. This will furtherexacerbate supply shortage of feedstock LPG in the market, sources noted.

"It is still not clear how many refinery alkylation units will be launched this year. The trend is that more feedstock LPG will get consumed by refineries instead being sold to the market, which means more imports will be needed to meet demand from independent alkylation plants," one source said.

China currently has alkylation capacity of around 18 million mt/year, with estimated operation rate of around 50%, according to domestic energy information provider JLC. Alkylate is another major blending component in gasoline, with around 8%-10% blended into refinery produced gasoline tomeet National Phase 6 emission standards.