Commodities 2023: China LPG imports set to grow double digits in 2023 as PDH plants eye stable feedstock

China's LPG imports are projected to grow double digits in 2023 on expectations of competitive feedstock as supply stabilizes, though demand from propane dehydrogenation plants could be moderated by a gradual, yet tentative, recovery in petrochemicals margins.

The outlook is murky for China's steam crackers as increased naphtha from new refineries in the Middle East is expected only in the second half of the year. Though naphtha is pressured by poor downstream margins, feedstock costs are hoisted by high freight, driven by shifting trade flows from the upcoming EU ban on Russian-origin oil products.

China's LPG imports over January-November 2022 rose 7% on the year to 24.2 million mt, led by supply from the US, the UAE, Oman, Qatar and Saudi Arabia, customs data showed.

The imports include discounted supply from Iran. After 6.82 million mt were exported in 2022, mainly to China, Iranian shipments are seen at 8.3 million mt in 2023, shipping sources said.

Trade sources estimated China's 2022 LPG imports at 26.3 million mt, up 7.35% from nearly 24.5 million mt in 2021, and projected 2023 imports around 31.8 million mt, up 21% on the year.

"It is valid, provided olefins margins are workable for crackers and PDH," one China-based trader said, referring to the import projection.

"End-user buying appetite should improve in 2023 since LPG prices are lower."

S&P Global Commodity Insights analysts estimated Chinese PDH plants would process 12.277 million mt LPG in 2023, up 23.5% from 10.34 million mt last year.

Chinese steam crackers would process 5.06 million mt propane in 2023, down almost 17% from 6.1 million last year, while butane cracking is expected at 2.22 million mt this year, down 17.2% from 2.68 million mt in 2022, S&P Global has estimated.

Propane supply from the US gas plants is expected to increase 6% on the year in 2023 as of now, S&P Global said.

However, Middle East LPG exports would drop 1 million-1.5 million mt this year on lower gas production following the OPEC+ decision Oct. 5 to cut the oil production quota by 2 million b/d from November 2022 to December 2023, S&P Global has said.

The scheduled launch of six PDH plants in 2023 with a combined propylene capacity of 4 million mt -- after seven started up in 2022 -- would boost China's feedstock imports, according to S&P Global data. Total capacity additions would rise to about 31.7 million mt over 2022-23.

This could exacerbate the propylene and polypropylene overhang through second-half 2023 while regional supply remains abundant, capping the rebound in margins.

Prices stabilize

CFR North Asia propane prices steadied to average $625.90/mt in December after jumping to eight-year highs above $1,000/mt in March 2022, on global supply fears following Russia's invasion of Ukraine. Prices have averaged $625.14/mt Jan. 1-11, S&P Global data showed, on steady supply after the early-2022 volatility.

Saudi Aramco's term contract prices in 2022 plunged to $590/mt for the January 2023 propane contract price, matching the October propane CP that was the lowest in 16 months, from 10-year highs in March following the Russian invasion.

Traders and analysts have been banking on a reinvigorated Chinese economy to absorb excess olefins production, as China gradually removed COVID-19 restrictions since December.

"PDH margins should improve with recovering demand," a China-based trader said, adding that reopening is key.

China's economic growth is projected at 3% in 2022 -- the slowest since 1976, excluding 2020 when the virus was starting to spread -- below the government's target of 5.5%, due partly to its zero COVID-19 policy.

China has reopened borders for travelers after three years even as the pandemic rages, raising hopes the beleaguered economy could be revitalized. But some market sources did not expect a full economic reopening till the end of Q2.

With easing restrictions and hopes that infections would slow by the second half, some economists projected 2023 growth at 6% or higher.

Uncertain recovery

China's PDH margins have seen losses since November 2021, which deepened through 2022 on poor demand, forcing plants to cut operating rates.

PDH plants' average processing margins were estimated at Yuan 33/mt in October, before reverting to a Yuan 1,051/mt loss in November, according to data from S&P Global and domestic information provider JLC, as production increased.

Processing margins averaged minus Yuan 3/mt in December, according to JLC.

Steam cracker margins are expected to improve later in the year as feedstock costs ease on healthy supplies from the US, along with hopes of a rebound in downstream demand in H2.

Nevertheless, weak export demand of finished goods due to the global slowdown would see margins closer to, or just above, breakeven, energy consultancy FGE said. Margins might not be strong enough even in H2 to keep PDH and steam cracker operators running near maximum capacity, FGE added.

Middle East naphtha supply is set to rise later this year with the full startup of Kuwait's 615,000 b/d Al Zour refinery that could export 3 million mt/year of full-range naphtha. Oman's 230,000 b/d Duqm refinery would boost production over H2 and can export 2 million-2.5 million mt/year of full-range naphtha.

Asia has also been receiving cheaper naphtha-like material diverted following the EU ban on Russian oil products, creating a two-tier market. Similar cargoes from commercial storage tanks were said to be available at discounts of $7-$10/mt versus open-specification naphtha, said a trader, showing that the mainstay naphtha market remains supported by limited supply.