Singapore — The Asian light ends market is expected to have a bumpy ride this year as LPG prices in the region will largely hinge on relations between the US and China, and Iran, while gasoline may remain sluggish amid a glut and as fresh refining capacity comes online.
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Supply-side fundamentals in the Asian LPG market during 2019 will be dictated by how long the US-China trade war and the US sanctions on Iran's oil and gas exports will persist.
China's tit-for-tat action in imposing higher tariffs on US LPG have largely halted imports and created a two-tier spot market -- a Middle East market which is in line with prevailing market conditions and a US market that carries a discount to Middle Eastern cargoes.
This is expected to continue in 2019 as Chinese importers seek alternative cargoes from the Middle East and Africa, while Asian buyers such as Indonesia and South Korea absorb US tons.
Iranian LPG exports almost dried up following the sanctions in November, after the country shipped more than 4.2 million mt in the first 10 months of 2018, or a monthly average of 420,000 mt -- largely going to China to meet growing demand for propane dehydrogenation. Trade sources said the latest US sanctions had been more impactful as they directly affect shippers, end-users and financial transactions.
The market is also watching the effect of OPEC oil cuts from January on LPG production, though industry sources have said Middle Eastern term LPG supply will be largely steady.
Incremental supply has started from Bahrain, where Banagas' 2019 term exports have almost doubled to 377,000 mt with the startup in November of its third Central Gas Plant with a capacity of 350 MMcf/d.
New supply which recently started from Japan's Inpex-operated Ichthys project in Northwest Australia is expected to continue meeting demand in China and Japan.
Demand from India, which has surpassed Japan as Asia's second largest importer, is expected to continue growing in 2019, after consumption fell almost 8% year on year in November -- the first drop in more than five years.
While a senior executive at one of India's oil marketing companies told local media that LPG penetration has almost reached saturation point and consumption may be flat or decline in future, traders said this could be a temporary phenomenon and consumption would have recovered in December.
Indonesia will remain sensitive to price movements in its negotiations for 2019 supplies and explore more diverse sources, as the country grapples with the weakening rupiah currency, even as LPG demand continues to grow as the fuel is used for widening purposes in households and transportation.
Chinese LPG demand from the petrochemical sector is set to grow further in 2019 with the year-end start-up of Zhejiang Huahong New Material's 450,000 mt/year PDH plant at Jiaxing city, Zhejiang province. The project is awaiting environmental impact assessment from the Zhejiang Environmental Protection Bureau.
Zhejiang Satellite Petrochemical's phase two 450,000 mt/year PDH project is expected to be completed by end-2018, while Dongguan Juzhengyuan's 600,000 mt/year PDH plant is set for an early 2019 completion.
SUPPLY FROM NEW REFINERIES TO WEIGH ON GASOLINE
Fundamentals in the Asian gasoline market are likely to remain weak in 2019 despite being supported by the Middle East, as South Asia searches for fresh regional demand while nursing a hangover from 2018's supply glut, sources said.
China has awarded the first round of gasoline export quotas for 2019 at 5.19 million mt, down 20.8% year on year. Despite the lower quota in the first round, supply is set to rise as new refineries Hengli Petrochemical and Zhejiang Petrochemical come online in Q1 and Q2 2019, respectively. Quotas are expected to rise in future rounds as part of the Chinese government's continued efforts to ease a bloated domestic market. Both refineries will add a total of 800,000 b/d to Chinese output.
Outside China, new projects such as Malaysia's 300,000 b/d RAPID refinery coming online in H1 2019 will add 98,000 b/d of gasoline to the market. This, coupled with steady run rates from refineries in North Asia, adds to mounting concerns of supply.
Uncertainty prevails on whether South Korea's tax reduction on auto fuels will provide any noteworthy support to gasoline markets. Although lower pump prices may help raise demand, many believe that any significant rebound in gasoline demand will only be seen at the start of the driving season in mid-2019.
There is little new regional demand that could help absorb the Asian surplus.
Indonesia's purchasing power for refined oil products has been severely circumscribed by a depreciating rupiah, market sources said. The government's efforts to reduce the country's current account deficit and lower its import bills will also put a ceiling on any fresh demand from Southeast Asia's largest importer of gasoline.
On a bright note, demand from Africa, Pakistan and India is likely to remain strong while supply is expected to tighten as Middle Eastern refineries go on turnaround in H1 2019. Middle Eastern producers are also collectively expected to cut the usage of lighter grade crude oil due to low refining margins, which will further tighten supply of gasoline within the Persian Gulf.
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