Latin American LPG Market Undergoing Transformation

(November 16, 2017) — IHS Markit writes that the expansion of the Panama Canal, which now allows transport of greater, cheaper volumes of LPG, combined with the opening of the Mexican energy industry to private investment, has dramatically shifted the trade balance and altered how regional LPG companies must compete. LPG is a fuel used primarily for residential and commercial cooking and heating in Latin America and other regions, but also for feedstock in chemical production.

“For nearly 70 years, Latin American producers and marketers of LPG operated in a relatively closed market with prices controlled by the state, so they didn’t concern themselves with the global market,” says Adrian Calcaneo, senior consultant and head of Latin American and Caribbean NGL service at IHS. “However, many company leaders are telling us that nearly overnight the business has changed, and they now must consider the major market competitor that is Asia, and how they compete with the Mont Belvieu price benchmark. What happens in these places now matters to LPG producers in Latin America. They are being forced to adjust their business and service models in a rapid and significant way, and the transition is not easy.”

These major market shifts drove discussions at the IHS-hosted Latin America LPG Seminar and Workshops 2017, Nov. 7-9, 2017, in Panama City. Other market impacts were discussed, such as Hurricane Harvey, which affected about 45% of NGL fractionation capacity at Mont Belvieu and caused refineries throughout the Texas Gulf Coast to either be shut down or operate at reduced rates for an extended period. Harvey also shut down marine exports of LPG, roiling the market.

“Hurricane Harvey shut down LPG exports from the U.S. for a week and it caused some Asian markets to react strongly,” Calcaneo observes. “Fearing supply shortages, countries such as Japan bought much of the excess supply, which caused prices to shoot up rather quickly. This phenomenon shocked some producers and importers in the Latin American region, who were not accustomed to managing such market shocks and considering what is happening in China or Japan. While supply disruptions were minimized in the region, if anything, this natural disaster reinforces the need for further storage to be developed in Latin America.”

He adds that, increasingly, the region has become more dependent on the U.S. for LPG imports. The significant quantities of cheap LPG coming from the U.S. is changing the balance of trade and pricing for both importers and exporters. Mexico and Brazil are net importers, and are importing at Mont Belvieu prices. Argentina, on the other hand, is an exporter of LPG, but it must also compete with cheaper Mont Belvieu prices. Argentina formerly sold LPG to Chile, but now competes with exports from the U.S. Bigger ships now transiting the Panama Canal are enabling more LPG volumes to be transported from the U.S. to Asian markets, but also to the west coast of Latin America, particularly to Chile and Colombia, which each have plans to add marine terminals to process imports. Currently, 35% of the expanded traffic going through the Panama represents LPG cargos.

“Before the expansion of the Panama Canal, only four of the largest LPG ships were able to transit and other VLGCs generally used an alternative route around the Cape of Good Hope,” says Scott Gray, senior director of waterborne energy insight at IHS Markit. “The canal expansion was completed in June 2016, and by the end of 2016, nearly all LPG VLGC traffic was moving through the canal. Unfortunately, the VLGC shipping market was already grossly oversupplied, and the significant shortening of the trade route from the U.S. to Asia effectively added even more length to the shipping market.” IHS expects VLGC rates to remain depressed through at least the end of the decade.
Meanwhile, by the time the Panama Canal expansion was completed, nearly all incremental U.S. LPG exports were already being directed to Asia, Gray says. Consequently, the expansion did not change either the source of global incremental LPG supplies or their ultimate destination. However, it did reduce the distance traversed and the time required, and therefore impacted the amount of risk inherent in making trades.

Aside from imports and exports to other regions, the Latin American LPG market is now ripe with inter-regional expansion, notes IHS. “Now companies that grew to capacity in their native countries have expanded to other countries in the region, so understanding market dynamics and the competition is something our customers are asking from us...,” says Calcaneo. Any LPG production that exists in the region will go first to residential and commercial demand because that market pays the most, but that hasn’t stopped regional producers from considering other possible uses for excess output or imports of other NGLs, including use as petrochemical feedstocks.

“While a very small percentage of propane is actually being used in the region for petrochemical feedstock, the petrochemical market is seeking alternative supplies for feedstock derivatives, and NGLs from the U.S. are increasingly becoming more attractive,” comments Rina Quijada, senior director of Latin American petrochemicals and feedstocks research at IHS Markit. “The larger ships coming through the Panama Canal create better economies of scale, and those imported NGL cargos are cheaper.” She adds that while Brazil continues to work on its pre-salt hydrocarbon resources and Argentina is setting the stage for greater investment in its gas resources in the Vaca Muerta play, these projects are longer-term. “In the meantime, Argentina, Mexico, and Brazil will increasingly lean on the U.S. for additional NGLs.”

(SOURCE: The Weekly Propane Newsletter, November 13, 2017)