The Asian LPG paper market flipped to a slight contango for the first time since August last year Wednesday, on active selling of August Saudi Aramco propane Contract Price swaps, market sources said Thursday.
If the structure steepens further, importers from Japan might start buying cargoes to stockpile for winter, they added.
The prompt August propane CP swap was notionally indicated around $1/mt below the September CP propane swap early Thursday. At the 0830 GMT Asian close Wednesday, the August propane CP swap was at a $3/mt premium over September and was later at parity during European close Wednesday, brokers said.
The forward timespread of September/October CP swaps was indicated around parity early Thursday, after closing Asian trading at a $2/mt premium and in Europe at parity on Wednesday.
"If the contango gets steeper," Japan buyers might start importing for August and September to fill up the current low inventory ahead of winter, a Japan-based trader said Thursday.
The active selling of August propane swaps seen Wednesday was led by Japanese traders, said sources, in a market buyers had considered too strong and in need of a correction.
"If the backwardation continues, then Japanese [traders] will keep selling front-month [propane CP swaps] and buy back later," one North Asian trader said.
"But they may not buy right away, they still need to watch the [market] for direction first," he added.
Some traders said the timespread on the Argus Far East Index swap would also need to flip to a contango structure to persuade Japan to start importing actively. "If the contango pays for the cost of freight then it makes sense," one source said.
The August/September FEI propane swap spread was indicated around $5/mt in backwardation early Thursday, compared with plus $11/mt earlier this week, while the September/October spread was indicated around plus $3/mt versus $8/mt earlier in the week, brokers said.
The backwardated market structure seen for almost a year had prompted Japanese importers to keep imports at a minimum, especially during last year's winter when it drew on its stockpiles to meet heating demand, which also helped the Platts CFR North Asia propane assessed price to slide to below $900/mt in January, data showed.
The slow pace of Japanese imports sent the CFR Japan propane marker to $728/mt on April 23 -- the lowest since July 9, 2012 when it hit $713/mt, Platts data showed. On Wednesday, price of propane cargoes for delivery along the Singapore-Japan route was assessed at $855/mt, down from a four-month high of $878/mt hit on June 19, data showed.
The last time the propane swaps market was in a sustained contango structure was between August 1-22, 2012.
EYES ON JAPAN STOCK LEVELS AHEAD OF WINTER
Japan's LPG stocks fell 1.9% to 1.911 million mt on May 31, driven by declining imports, ending two straight months of growth, data from the Japan LPGas Association showed. But LPG stocks were 7.4% higher than May 2012 stocks of 1.78 million mt.
Japan's May LPG imports fell 10.6% both month on month and year on year to 893,000 mt, the data showed. April imports fell 23% from March.
Propane drove the month-on-month drop in overall stocks, down 6.3% to 1.071 million mt at the end of May, versus 1.143 million mt in April. However, propane stocks rose 8.2% from the year-ago level of 990,000 mt.
"Current stocks are not low, but not high either. It's at a comfortable level," said one Japanese end-user.
The drop seen on propane stocks also flipped the spread between the front-month Argus Far East Index swap and Mean of Platts Japan naphtha swap assessments back into a $10/mt discount Tuesday -- after a week at premium levels -- and deepened further into negative terrain Wednesday at minus $27.50/mt.
At these levels, FEI propane swaps were 96.8% the price of naphtha Wednesday, which was not low enough for petrochemical producers to switch to using LPG as feedstock, said traders. But North Asian petrochemical makers, such as Taiwan's Formosa Petrochemical Corp., are eying its viability.
"We can consider using LPG if the spread between [propane and naphtha swaps] is at minus $40/mt," a North Asian trader said.
South Korean and Taiwan petrochemical producers had used LPG as an alternative feedstock between end-February and early-June, when the product was at a steep discount to naphtha.
Propane's drop has also narrowed its premium to butane to around $2/mt on Wednesday, from $5/mt after Saudi Aramco set its July CPs, and traders expect this to crunch further to parity on Thursday, Platts data showed.
