Future of LPG Shipping Hinges On North American Weather

LPG exports are so dependent on the severity of winter in North America that all eyes are now on the weather, this because severe weather hit demand for very large gas carriers (VLGCs) last year, according to the latest edition of the “LPG Forecaster,” published by the shipping consultancy Drewry (London).

Last year, a shortage of propane in many areas of the U.S. led to a steep price rise, closing the price differential between U.S. exports and the rest of the world. Far less expensive American propane was suddenly priced much higher. This caused a large drop in export demand, with many cargo cancellations. Demand for the first quarter of 2014 was 10% lower than that of the fourth quarter of 2013, Drewry reports.

“Although the use of LPG in residential heating in the U.S. has been declining because of abundant natural gas, 14 million tonnes of LPG is consumed every year for domestic heating, in addition to 2.2 million tonnes for crop drying,” said Shresth Sharma, Drewry’s LPG shipping practice analyst.

This year, export demand has recovered. The U.S. exported 4.1 million tonnes of LPG during the third quarter, up 28% from the same period last year, registering a record high of 1.5 million tonnes in July. Much of this is destined for the Asia-Pacific region, which accounted for 20% of total U.S. exports in the third quarter, up from 19% last year. This has been reflected in rising VLGC spot rates, which averaged $115 per tonne in the third quarter, a rise of 55% on the same period in 2013.

Rising exports have been fueled by expansion of Targa Resources’ Galena Park terminal in Houston, where a 50% increase in capacity has come on stream ahead of schedule. However, future export demand will be driven more by domestic weather conditions. Sharma elaborates, “Climatic conditions in the coming winter will determine how much LPG is consumed in the U.S. If the weather remains clear in the coming quarter, crops will be dried in the sunlight and less LPG will be used for heating. However, if the temperature drops to last year’s levels, increasing demand from both sectors could curtail exports, and hence the LPG shipping trade.”