A handful of major LPG importers in North Asia are noticably holding back this year during the seasonal year-end scramble to secure term supply for the year ahead, traders said Thursday.
This prominent minority is taking a new approach; keeping monthly import volumes steady for the moment and avoiding being locked into long term contracts, believing the current outlook will favor replenishing stocks in the new year instead, traders said.
This is despite bullish demand forecasts for 2018, traders said.
In China, the world's largest LPG importer, consumption is broadly expected to rise across refineries, petrochemical makers and for energy use in 2018, but a few end-users are shying away from increasing their term import volumes.
Private gas distributor Jovo Energy is delaying term talks for the moment and will only consider securing a term contract for the second half of 2018 after the Lunar New Year, a close company source said this week.
Its existing deals with various international trading companies were sufficient to meet its requirements for H1, the source added.
Jovo owns a receiving terminal in Dongguan in southern Guangdong province with a storage capacity of 60,000 mt that receives 2-3 VLGC cargoes/month of LPG.
Fellow Chinese gas distributor New Ocean Energy has also confirmed it will maintain its shipments at 44,000 mt/month on a DES basis in the year ahead, unchanged from 2017.
Chinese petrochemical maker Zhejiang Satellite, which has a propylene capacity of 450,000 mt/year, is also keeping its 2018 LPG term volumes unchanged from 2017. It has a storage terminal at Lianyungang in northeastern Jiangsu province that can hold up to four VLGC-sized propane parcels.
BASED ON BACKWARDATION
Traders attributed the wait-and-see strategy to expectations among these buyers that the current steep backwardation in prices will result in cargoes being available at lower prices in early 2018 to cover any shortfall in their requirements.
The February/March Argus FEI propane timespread was assessed at plus $29.50/mt Wednesday, and the January/February FEI propane timespread at plus $8.50/mt.
Asian buyers were also deciding which pricing mechanism to base their term contracts on; Saudi Aramco contract prices on a free-on-board basis or the Argus FEI pricing that is cost and freight inclusive.
By locking in term cargoes using Saudi Aramco's CP, buyers would pay higher fees for shipments in the event freight rates rise next year. Term cargoes fixed on an CFR basis would benefit in this instance by not having to pay an additional premium for shipping.
Rates in recent months have been volatile for Very Large Gas Carriers along the Persian Gulf-Japan route, falling to year-to-date lows in the high $18s/mt in August-September before rebounding to remain above $32/mt since December 11. Should they rise any further before year end, this could make CFR basis contracts more attractive.
One trader expected importers to turn to shorter-term delivered basis contracts, while another source said they would prefer to purchase on the Saudi Aramco CP basis in the expectation that FEI prices would see milder backwardation than the Saudi Aramco CPs.
"We will definitely see a more active spot market for 2018. Hopefully this will provide more price transparency," a third LPG trader said.
