Two recent developments have led Japan to realize that US supplies of LPG may not always be cheaper than supplies from the Persian Gulf, or as available, throwing into some question a strategy to access more US-produced LPG in the future.
Reported delays in completing the upgrade to the Panama Canal undermines one leg of the Japanese plan for importing more US LPG. Sourcing more US LPG shipped through the wider canal had been expected to bring about lesser shipping costs, as a result of the shorter route from the US through the canal.
A second blow in recent weeks to the Japan/US LPG vision has been the runup in US propane prices as a result of the ongoing severe cold US winter, and a propane price spike that sent US levels soaring. It’s been a wake-up call for Japanese buyers who are realizing that US LPG may not always necessarily be a cheaper alternative.
Japanese buyers of US LPG contacted by Platts shared their views that any delay in the canal expansion could defer the reduced freight rates they are expecting to enjoy because of the shorter route. But still, those plans are still in place. The combination of higher prices and the canal delays have not ended the goals of Japanese buyers to seek US LPG as part of their ongoing efforts to diversify their supply sources and pricing benchmarks.
The expansion is now expected to be finished in December 2015, six months later than the previous revised date of June 2015. The project was originally scheduled for completion this year. The upgrade, which will significantly widen and deepen the 80 km (50 mile) waterway, will allow many more Very Large LPG tankers, or VLGCs, to use the 100-year old canal, with exports out of the US a key beneficiary of the change.
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For instance, an official at Japan’s top LPG supplier, Astomos Energy, said the company intends to move forward with its efforts to diversify its supply sources and avert the regional risks from sourcing so much of its LPG from the Middle East. The official noted it is also undertaking efforts to procure LPG from Angola and Nigeria.
Japanese buyers also have been seeking imports of LPG linked to markers away from the traditional benchmark of the Saudi Aramco Contract Price, such as those based on the price at the price in Mont Belvieu, Texas, the key US Gulf Coast delivery point. Any US-sourced imports would be expected to be sold at the Mt Belvieu price.
By 2018, Japan’s LPG imports from the US are expected to rise to around 3 million mt/year, accounting for about 20% of what are expected to be at that time total imports of around 14-15 million mt/year, Japan LP Gas Association Chairman Tatsuhiko Yamasaki said last November. (In November and December, the last two months for which data is available, the US Energy Information Administration reported US exports to Japan of 63,000 b/d. Those are record-high figures.)
In fiscal 2012-13 (April-March), Japan imported 13.19 million mt of LPG, with Middle Eastern supplies accounting for almost 84% of the total, association data showed. Japan imported 462,000 mt of LPG from the US, accounting for 3.5% of total imports in fiscal 2012-13, according to the association. But that was before any increase that the last two months of US export data is indicating may be underway.
But what happened during those two months now may have been thrown off track in the beginning of 2014. Japanese buyers of US LPG have seen that the surge in US demand and prices due to the cold snap has drastically narrowed the discount between propane prices at Mont Belvieu, Texas–the Gulf Coast NGL trading hub–and CFR prices of propane cargoes for delivery along the major Singapore-Japan route. It even flipped briefly to a slight premium.
During that period, some international cargoes of LPG bound for Europe had also been diverted to the US to meet the surge in winter demand.
The jump in Mont Belvieu propane prices on February 10 to $1.70/gallon, or $885.70/mt, sent US prices–after taking into account a VLGC freight rate of $168/mt from Houston to Japan—temporarily to a premium of $135.7/mt versus the CFR Japan propane price, which Platts assessed at $918/mt.
But the premium US cargoes experienced versus Asian prices started to narrow after that and the spread eventually flipped back in favor of CFR Japan prices. By March 3, the premium of CFR Japan propane to US propane prices–after taking into account a VLGC rate of $177/mt–widened to around $138/mt, as the frenzy of US demand eased as some bottlenecks straightened themselves out (though it was still cold.)
During Japan’s winter and summer demand season, which normally span December-March and July-September, respectively, Japan utilities such as Tokyo Electric Power Company has the option to use other fossil fuels such as fuel oil or LNG when LPG becomes too expensive for power generation.
One other alternative: Canadian LPG. Its prices would be tied to the US levels, but its exports wouldn’t be exposed to delays to the Panama Canal expansion. As of now, Canadian capacity to export LPGs off the West Coast is limited but there have been announced plans to build capacity, as well as broad statements that this is an opportunity that Canada should not pass up.