U.S. Imports into China Won’t Deter Flow from Canada

Following the recent tariff exemption granted by the Chinese government, industry sources have noted the resumption of U.S. LPG imports into China the will not hamper the flow of other Western cargoes, including those from Canada, into the region. The Chinese government approved tariff exemptions for many propane dehydrogenation plant operators, including Wanhua Chemical and Oriental Energy, as well as retail distributors like CNOOC and ChinaGas, for importing U.S. LPG cargoes for March and April delivery, after an 18-month hiatus, reported S&P Global Platts.

The U.S. was the second largest LPG supplier to China in 2017 at 3.54 million metric tonnes, a mix of 3.37 million metric tonnes of propane and 162,668 metric tonnes of butane. The volume dropped 54% a year later in 2018 to 1.62 million metric tonnes as a result of trade tensions between the two economies, and in 2019 only 2443 metric tonnes of U.S. propane was imported into China, customs data showed.

To help alleviate the loss of U.S. flows, other suppliers from Australia and Canada have shipped an estimated 50 shipments of LPG cargoes to Asia over the last two years, traders said.

Most of the new supply was shipped to China, which together with West African and Mediterranean LPG, helped fill the gap created by the U.S.-China trade tensions that led to restrictive import tariffs.

Canada's Altagas, which has issued spot tenders from time to time since 2017, recently sold 44,000 metric tonnes of propane for loading over April 11-15 to a trader, market sources revealed.

In total, Canada exported 460,745 metric tonnes or approximately 10 44,000 metric tonne propane cargoes to the Far East in 2019, customs data showed, of which 182,532 metric tonnes, or roughly four cargoes, landed in China.

In 2019, five of Altagas' cargoes were shipped to Japan on a term basis, which is not surprising given that Astomos, Japan's largest LPG supplier, had signed in 2017 a multi-year term purchase agreement with Altagas to offtake 50% of Ridley Island's propane output.

The remaining five cargoes from Altagas were sold on a spot basis via tenders and Chinese importers has been aggressively bidding for these cargoes, edging out competition from Japan and South Korea, sources said. The Chinese were generally willing to pay a higher premium, outbidding competitors, as restrictive tariffs meant that the U.S. was no longer a viable alternative source of supply outside the Arabian Gulf. The last spot cargo was imported by South Korea in June 2019.

While these import restrictions from the U.S. have now been relaxed, traders have told S&P Global Platts they do not expect this to hamper Canadian LPG flowing into China.

"The tariff exemptions roll every month and so it will depend on market fundamentals that month and the distance to the Far East from the port of loading," a China-based importer said.

In addition, the Panama Canal Authority, or ACP, announced in January a new freshwater fixed fee of $10,000 for ships over 38.1 meters, effective Feb. 15, which affects all LPG ships. "It [Canada to China] is still better than going through the Panama canal," a China-based trader said.

Outside of Japan and South Korea, China is unlikely to face much competition for Canadian volumes, as longer voyages to Southeast Asia and India make such trade flows uneconomical for traders. In addition, countries such as India and Indonesia use LPG predominantly for combustion in the residential sector, and have traditionally preferred to buy evenly split, or 33:11 split cargoes from Middle Eastern suppliers, rather than full propane cargoes from the U.S. or Canada due to the higher calorific value of butane.
However, one major concern lingers over regular Chinese imports of Canadian propane going forward. More than one trader familiar with the quality of the cargo has told Platts that the methanol content in Altagas' propane cargoes is found to be much higher than the 50 ppm restriction required by most Chinese PDH plants, making it unsuitable to be imported as feedstock for propane dehydrogenation.

As such, it is likely that while domestic distributors such as ChinaGas and Oriental Energy continue to bring in volumes from Canada going forward, especially when there is an opportunistic arbitrage, these will end up in the residential sector. For the time being, the Chinese PDH plants will need to look elsewhere.

(SOURCE: The Weekly Propane Newsletter, March 19, 2020. Subscribe to receive all the latest posted and spot prices from all major terminals and refineries around the U.S., featuring a center spread of posted prices that includes hundreds of postings completely updated each week, market analysis, insightful commentary and more.)