China's petchem plants could be closed as US LPG tariffs loom
Industry insiders say that Chinese petrochemical manufacturers who buy US LPG worth $11 billion annually will cut production or close for maintenance as Beijing's tariffs on U.S. imported products drive up prices. Over 30 PDH plants rely heavily on U.S. LPG or propane for the production of propylene, a plastics intermediate.
Armaan Ashraf is the global head of natural gases liquids for consultancy FGE. He said that tariffs may force Chinese PDH operators cut their average operating rates by 15 percent and reduce demand for propane at steam crackers and PDH by at least 500 000 metric tons each month.
A Chinese executive from a major PDH factory in east China said that the tit-fortat trade war, which saw China increase retaliatory tariffs on U.S. imported goods to 84% on Wednesday, threatens to plunge a Chinese PDH industry already struggling with thin margins under two years of hard times into a harsh winter.
According to the executive who declined to be identified due to company policies, he expects that overall PDH plant utilization rates will drop below 50% of total industry capacities as early as in May. According to FGE and industry insiders, China's 731,000 bpd PDH sector operated at about 70% capacity in March. This is down from a peak around 85% of capacity in 2020. Plants lost an average of 480 yuan per ton during the week ending April 6, a steeper decline than the previous week's loss of 384 yuan. China imported a record 17,3 million tons or 550,000 barrels of U.S. Propane last year. This represents 60% of China's total propane imports.
China's LPG exports were halted for almost two years during the trade war that erupted under President Donald Trump. However, the industry at the time was smaller and operators relied on cargoes imported from the Middle East to replace them.
PDH plants have mushroomed along China's East Coast over the last decade. Fueled by cheap U.S. Propane, a byproduct of shale-gas boom, they are overcapacity due to a weakening propylene demand.
The Far East Index, which measures the price of U.S. LNG for Asian exports (or propane) fell by nearly 30% this week to $425 a ton as traders accounted for Beijing's retaliatory duties last Friday. It's not clear whether U.S. buyers and suppliers can agree on lower prices for physical shipments to absorb the shock. Some buyers might be able re-negotiate prices with their suppliers, if the contract allows it, while others with long-term supply agreements may have to resell products to other Asian buyers.
The growing price gap between Middle East and U.S. barrels is limiting the ability of Chinese plants to exchange U.S. shipments with Middle East rival barrels, which are mainly destined for South Korea or India.
"The market remains in a state of shock and confusion. Both buyers and sellers are struggling to make a deal. "The tariffs have completely thrown pricing out of balance," said an experienced trader.
(source: Reuters)
