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Analysis: New PDH plants to drive China's LPG demand, trade war a concern

Singapore — New propane dehydrogenation, or PDH, plants, will drive China's appetite for LPG in 2019, but the rate of demand growth will be slower than previous years because of the US-China trade war and the rising use of natural gas by the residential sector.

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China's LPG apparent demand is estimated to grow around 4% year on year in 2019, slowing from around 8% in 2018, according to data from S&P Global Platts Analytics.

"Three new PDH plants have been scheduled to start up in 2019, which are estimated to add around 1 million mt of propane demand this year assuming they all start as per schedule," said a source with China Gas.

Zhejiang Satellite Petrochemical in eastern China has started phase two of its the 450,000 mt/year PDH plant from late January. It is capable of processing around 540,000 mt/year of propane at full capacity.

Although it is the first year of operation, Satellite has said the new unit will run at relatively high capacity as the company already had previous experience in operating a PDH plant.

In addition, Fujian Meide Petrochemical, a wholly-owned subsidiary of China Flexible Packing Group in southeastern Fujian province, is expected to put its 660,000 mt/year PDH plant into operations in the third quarter of this year, according to a company executive. The plant can use up to 790,000 mt/year of propane as feedstock at full capacity.

Meide had been originally scheduled to start up in end-2014, but has been delayed for nearly five years. The company has not given any reasons for the delay.

In addition, Dongguan Juzhengyuan Technology's 600,000 mt/year PDH plant in the southern Guangdong province is also scheduled to be go on stream in the second half of this year, according to source close to the plant. It can use up to 720,000 mt/year of propane as feedstock at full capacity.

If the latter two PDH plants are launched as per schedule, China will be adding up to 1.7 million mt/year of propylene production capacity in 2019, which can use up to 2 million mt/year of propane as feedstock at full operating rates, Platts calculations showed.

Prior to this year, China only had eight PDH plants with a combined propylene production capacity of 4.6 million mt/year that can use up to 5.5 million mt/year of propane as feedstock when operating at 100% capacity.

In 2018, China's eight PDH plants ran at relatively high rates of around 82%, supported by sustained and substantial processing margins of above Yuan 1,800/mt ($269/mt), Platts calculations showed.

These PDH plants are expected to keep their operation rates high in 2019, according to market sources.

NATURAL GAS PENETRATION

The trade war between the US and China had led Chinese buyers to import LPG at relatively high costs over the past months. This could partially curb appetite for LPG in 2019 if the additional tariffs stay, market sources said.

Some Chinese PDH plants holding term contracts for US cargoes have to pay an additional premium to swap them for non-US barrels, in an effort to avoid paying the 25% tariff for US cargoes. This would inevitably push up the price of all non-US parcels, sources explained.

Trade sources estimate that Chinese LPG importers have to pay about $10-$20/mt higher to buy spot cargoes from the Middle East, or for US cargo swap.

The trade war hit China's LPG imports in 2018 despite efforts made by Chinese importers to replace US cargoes with those from the Middle East.

Total LPG imports edged up by only 3% year on year in 2018, compared with a year-on-year growth of 14% in 2017, according to data from the General Administration of Customs.

Besides, demand from residential sector is also expected to be constrained by surging natural gas penetration, particularly in rural areas within the north coast and southwest regions, according to Wang Zhuwei, senior analyst with Platts Analytics.

"We see that surging penetration of natural gas will continue to constrain LPG demand growth at around 72,000 b/d in 2019 from 118,000 b/d last year," Wang said, noting that the residential sector accounts for nearly 60% of China's total LPG demand.

UNCERTAINTIES

There are uncertainties surrounding the implementation of E10 gasoline, and demand outlook from alkylation units.

China is also promoting the use of E10 gasoline containing 10% ethanol, which will affect demand for MTBE, and in turn, have an impact on the 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 nearly 10% added to refinery produced gasoline to increase its octane number.

Should E10 become mandatory, ethanol will replace MTBE as a blendstock in the future. The promotion of E10 will inevitably weigh on MTBE demand, and affect demand for LPG as well, the source noted.

-- Analysis by Cindy Liang, newsdesk@spglobal.com

-- Edited by Irene Tang, newsdesk@spglobal.com