The slide in LPG prices over the past four days on abundant supply and an Asian demand pause has sent physical values to six-week lows and flipped the paper market to the steepest contango structure since early July 2012, market sources said Friday.
Prompt-month October propane Contract Price swaps was notionally at $5/mt below November early Friday in Asia, tracking the market structure in Europe overnight, after settling in Asia at parity for the last two sessions, according to Platts data and brokers.
The structure was last in a brief contango of $1/mt in early August, Platts data show. The last time the prompt month value was in a sharper discount versus the forward month was during July 2-3 last year, at minus $11/mt, Platts data show.
The November/December CP propane swaps timespread was notionally at minus $5/mt as well early Friday in Asia, also tracking Europe overnight and after closing in Asia at $4/mt in contango.
Also firmly reflecting a weak prompt market, front-month October Argus Far East Index propane swaps was indicated at $7/mt below the November contract, while November/December was in a deeper contango of $11/mt.
Traders said supplies have been plentiful and regional buyers have bought in advance.
"Twenty VLGCs per month out of the US Gulf Coast and China had pre-bought 1 million mt in April and May," one Western trader said, describing the Chinese buying as "borrowed demand," which could then limit further purchases. This comes as most of North Asia are also on traditional holidays.
Other than the US, the region has also seen more supplies from Iran in recent months, which went mainly to China and also bought by South Korean traders, sources said. This might have also dissuaded other major Middle Eastern exporters from showing spot offers for October-loading at current low prices, traders said.
The lack of FOB cargo activity in the Middle East is also piling pressure on VLGC freight rates, which have fallen more than 11% since mid-June, shipping brokers said. EYES ON JAPANESE WINTER DEMAND IF CONTANGO PERSISTS
One North Asian trader said despite the contango market structure and low prices, demand for second-half October cargoes remained dull.
"For first-half November and second-half November, there will be fresh demand," he said. "But second-half October, I am not certain. Don't think there will be any firm demand to support the market."
But another source said that until Saudi Aramco announces its October contract prices at the end of the month, some demand for second-half October will remain.
"There is space for importers, they can wait and make a decision," he said. "The market is now oversold, but it also depends on crude oil price and traders' activity."
Crude futures extended an overnight selloff in mid-morning Asian trade Friday, as dealers continued to book profits. At 0255 GMT, November ICE Brent crude dipped 25 cents/barrel from Thursday's close at $108.51/b, and the October NYMEX crude contract was down 27 cents/b at $106.12/b.
Japanese importers normally consider winter buying when the market shows a consistent contango structure.
But after some active buying for July to September to meet demand from Tokyo Electric Power Company to fuel air conditioners during the recent summer heatwave, imports have tapered as autumn dawns, though winter buying has not emerged yet, sources said.
Stocks in Japan are ample and going by last winter's experience, Japanese traders are likely to draw down existing inventories before resorting to imports, sources said.
Taken as a guide for possible LPG demand, Japan's crude and fuel oil needs for power generation this winter versus the last is set to fall 10-20%, as utilities maximize use of additional coal-fired generation capacity, Petroleum Association of Japan President Yasushi Kimura said Thursday.
He said Japan's recent power demand on a kilowatt-hour basis has been almost flat from last year, which would prompt utilities to choose coal-fired generation, rather than oil-fired generators normally used for peak demand hours, during the December-February winter season.
Prices of propane and butane cargoes for delivery along the major Singapore-Japan route were assessed Thursday down $12/mt day on day at $855/mt and $870/mt, respectively. Propane is at the lowest since August 7, when it was $852/mt, while butane was last lower on August 12 when it was $861/mt.
Prompt-month October FEI propane swaps was indicated early Friday at $845/mt -- even lower than Saudi Aramco's September CP of $850/mt -- while November FEI was notionally indicated at $852/mt.
LPG's slide has also sent the discount between propane and naphtha to the deepest level in more than four months, Platts data show, making it viable for more North Asian petrochemical makers to move to LPG as an alternative feedstock, traders said.
The discount between the front-month FEI propane swap and Mean of Platts Japan naphtha assessment deepened to $85/mt Thursday from $62.75/mt the day before. Propane was 90.9% the price of naphtha, versus 93.2% on Wednesday.
