China Turns to Middle East LPG to Replace Tariff-Hit US Gas

Chinese plastics plants that buy liquefied petroleum gas are turning to the Middle East to replace tariff-hit imports from the US, disrupting global flows and reviving moribund freight rates. 

The LPG buyers, seeking to swap US cargoes bought earlier with alternatives, have found that Persian Gulf producers including Saudi Aramco are able to help with those requests, according to traders. 

As many as seven supertankers – or very-large gas carriers – carrying US LPG and set to arrive in China in May and June will now head to India and Southeast Asia, the traders said, asking not to be named as they’re not authorized to speak publicly. In exchange, Middle Eastern shipments meant for those buyers will be supplied to end-users in China.

Aramco didn’t respond to questions from Bloomberg during regular working hours. 

US-to-China flows of American LPG, ethane, liquefied natural gas and crude oil have been in the spotlight in recent weeks, following the roll-out of crippling tariffs. LPG and ethane have been the hardest hit due to sizable exports from the US shale patch and China’s insatiable appetite for the fuels for plastics production. Some Chinese factories face the risk of closure if they can’t get enough of the feedstocks. 

China still faces an LPG shortfall of 470,000 tons per month even after accounting for potential supply from the Middle East, Citic Futures said in a report released Monday. But if the tariffs continue, propane dehydrogenation (PDH) plants that are already operating at a loss will have to cut activity rates below the current 65 percent to 70 percent as their feedstock inventories run out, it said.

The rerouting of LPG flows has resulted in an increase in what’s known as ton-mile activity for gas carriers, the traders said. That’s caused freight rates to rebound, with costs for the US Gulf Coast to Japan route rising from the lowest in almost four years, according to Baltic Exchange. Freight rates from the Middle East to Japan have also recovered.

Still, Chinese buyers may find replacement cargoes from the Middle East an imperfect substitute for their original purchases from the US. That’s because supplies from the likes of Saudi Arabia tend to comprise both propane and butane, while US shipments are typically 100 percent propane, which is more coveted by Chinese plants that turn the feedstock into plastics in PDH plants.