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Analysis: China LPG importers hit as US and Iran supplies squeezed

Singapore — Chinese importers of LPG have been hit with higher prices and narrower margins as the ongoing trade war and sanctions have forced them to axe supplies from two key LPG exporters -- the US and Iran.

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China's Propane DeHydrogenation or PDH plants, the main LPG importers, have sought alternative supply as they resell contracted volumes from the US, pushing up procurement costs even though the overall LPG market remains well-supplied.

"We now can only look for non-US origin LPG cargoes, including barrels from the Middle East, Africa and Australia," an executive at a Chinese LPG import terminal in eastern China said.

In 2017, the US was the second-largest LPG supplier to China with volumes totaling 3.5 million mt of propane and butane, accounting for 19% of the country's total LPG imports, according to data from the General Administration of Customs.

The US was the world's largest LPG exporter in 2017, accounting for 32% of global exports, followed by United Arab Emirates and Qatar at 11% each, Algeria at 9% and Saudi Arabia at 8%, according to Italian shipping brokerage Banchero Costa.

UAE was China's single largest supplier in 2017, accounting for 35% of total imports, customs data showed. China suspended publication of import and export data in April.

However, volumes from the UAE mask LPG cargoes from Iran, according to multiple industry sources, who said China has been the main buyer of LPG from Iran and term contracts with Iranian companies were not reflected in public data.

Between March and August, seven very large gas carriers or VLGCs shipped LPG from Iran to China, according to S&P Global Platts trade flow software cFlow. The three vessels tracked in August were LPG Scorpio, Gas Jasmine and Gas Jenny.

These volumes are likely to come under pressure as the November 5 deadline for US sanctions on Iran's petroleum sector nears.

HIGHER PRICES

Saudi Aramco set its September Contract Price for propane at $600/mt on an FOB basis, up $20/mt from the month before. The October propane CP was set at $655/mt, the highest since 2014, data showed. Aramco's monthly prices for loadings from Saudi ports also set prices for East of Suez LPG markets.

Refrigerated propane spot cargoes on a delivered basis to East China were estimated to average $651/mt in September, up $55/mt or 9.2% from August, Platts calculations showed. Higher import costs are mainly attributed to the escalation of the US-China trade war, market sources said.

Chinese PDH plants' processing margins in September are estimated to have retreated around 5.6% from August due to the higher cost of imports, according to Platts calculations. These plants typically secure half of their propane requirements under term contracts and the rest in the physical spot market.

The import cost was estimated at around Yuan 4,985/mt after accounting for currency exchange, taxes, operating fees and premiums for term cargoes, up Yuan 283/mt or 6% month on month.

Due to the trade war, non-US LPG cargoes carry a premium over US-origin cargoes, and executives at Chinese firms said swapping the cargoes carried a premium of $5-$10/mt.

Moreover, China stopped importing US LPG in late August, and the last shipment was the VLGC Ocean Orchid that arrived at Ningbo port on August 11, and departed China on August 24, cFlow data showed.

No US LPG vessels arrived at Chinese terminals in September, from two vessels in August and four in July, cFlow data showed.

SEEKING SUBSTITUTES

China's state-run Wanhua Chemical is in talks with suppliers for a term contract of African LPG cargoes, according to a company executive.

"We are still talking ... the CFR price of African barrels is currently similar to that of Middle East cargoes which is not very attractive," the executive said, adding that the quality of African barrels is not as good as the Middle East.

Wanhua Chemical operates a 750,000 mt/year PDH plant and a PO-MTBE plant at Yantai in the eastern Shandong province. The plant can process 900,000 mt/year of propane, while the PO-MTBE plant can process 600,000 mt/year of butane.

Higher tariffs forced Chinese firms to resell their US propane cargoes at discounts. Since last week Oriental Energy has been offering more propane cargoes in the Singapore physical market totaling 69,000 mt daily for H1 November deliveries, according to market sources.

The company, which runs two PDH plants in eastern China with a total capacity of around 1.5 million mt/year, is the biggest importer of US propane in the country.

China has imposed 25% retaliatory tariffs on $16 billion worth of US products including LPG starting from August 23 due to the trade war between the countries.

--Eric Yep, eric.yep@spglobal.com

--Cindy Liang, cindy.liang@spglobal.com

--Edited by Jonathan Fox, jonathan.fox@spglobal.com