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Chinese LPG buyers take North Sea cargoes to capitalize on open arbitrage

Singapore — Chinese buyers have bought three LPG cargoes from the North Sea for September delivery over the past week, signaling China's growing appetite for diversified supply as it avoids US cargoes due to high import tariffs amid the escalating trade tensions, traders said.

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The shipments from Norway's Kaarsto plant are seen as an opportunistic move due to the right shipping netback conditions, allowing for an open arbitrage as well as the high premiums that non-US cargoes command over US tons, traders said.

Hence, it did not herald a trend of more regular flows from the North Sea to China, they said. No cargoes have yet been seen traded for October delivery to China from the North Sea, which is normally a key heating supply source to the North West Europe market especially as winter approaches, they added.

"The three cargoes were brought from Kaarsto recently because the net back made sense. It would not have worked hadn't there been a $30-$40/mt premium for non-US cargoes," one trade source said.

Traders said Norwegian oil company Equinor last week was heard to have sold a 46,000 mt of propane for September 25-30 delivery at low $40s/mt premium to the October Saudi Contract Price.

Equinor was also heard to have sold last Wednesday a 23,000 mt H2 September loading propane lot to Petrochina at September FEI minus $11.75/mt, while the Norwegian company also sold a similar H2 September lot to Glencore at September FEI minus $11/mt.

The trade source said Equinor had not shipped any cargoes to China between January and August, but for September delivery of about 140,000 mt will be shipped, plus 46,000 mt to India.

"There is no pattern. Haven't been, won't be," he added.

WIDER SUPPLY SOURCES

Chinese buyers have lowered their imports of US propane since March 2018 and started seeking diversified supply sources in anticipation of increased tariffs. Since higher tariffs were imposed in July that year, Chinese importers had increased LPG volumes from Middle East producers, including sealing new long-term term contracts with Qatar Petroleum and ADNOC, while importers such as PDH plant operator, Wanhua Chemical, are seeking to increase their Middle East purchase volumes for next year.

Chinese buyers had also taken or sought cargoes from West and North Africa, Canada, Malaysia and more recently from Australia, where the Ichthys and Prelude LNG terminals had launched LPG exports.

When the higher tariffs took their toll, Chinese firms had started off by swapping US-origin cargoes for those not of US-origin and paid a premium of $5-$10/mt in the process, industry sources said.

The premium for trading Middle East and non-US cargoes gradually widened over the past year to $20-$30/mt, resulting in a two-tier market in Asia traders said, adding that North Sea LPG would be included in that group of non-US cargoes.

Another market source said the recent trades of North Sea tons into China had also been prompted by low prices in Europe, though this could change when the Q4 winter demand kicks in.

Higher freight costs between the North Sea and China -- almost double that of moving cargoes from the Middle East -- would also limit regular moves, sources said.

--Ramthan Hussain, mohd.ramthan.hussain@spglobal.com

--Edited by Norazlina Juma'at, norazlina.jumaat@spglobal.com