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LPG Trade Shifting on Mexico Energy Reform, Panama Canal Expansion

Mexico’s energy reforms, in combination with the expansion of the Panama Canal, have reconfigured the fortunes for liquefied petroleum gas (LPG), according to an analysis by IHS Markit.

LPG, a blend of propane and butane that is used in Latin America and elsewhere for residential and commercial cooking/heating, also may be combined with other natural gas liquids (NGL) as feedstock for petrochemical production.

“For nearly 70 years, Latin American producers and marketers of LPG operated in a relatively closed market with prices controlled by the state, so they didn’t concern themselves with the global market,” said IHS Markit senior consultant Adrian Calcaneo, who is lead for the Latin America and the Caribbean NGL Service.

“However, many company leaders are telling us that nearly overnight the business has changed, and they now must consider the major market competitor that is Asia, and how they compete with the Mont Belvieu (TX) price benchmark.

“What happens in these places now matters to LPG producers in Latin America. They are being forced to adjust their business and service models in a rapid and significant way, and the transition is not easy.”  

The NGL market can be jostled by many factors, including storms, as it was during Hurricane Harvey, which came ashore in South Texas in late August. Harvey impacted about 45% of the NGL fractionation capacity at Mont Belvieu. It also caused refineries in the Texas Gulf Coast region to either be temporarily shuttered or operated at reduced rates. Marine NGL exports also were halted during the storm.

“Hurricane Harvey shut down LPG exports for the U.S. for a week, and it caused some Asian markets to react strongly,” Calcaneo said. ”Fearing supply shortages, countries such as Japan bought much of the excess supply, which caused prices to shoot up rather quickly.

“This phenomenon shocked some producers and importers in the Latin American region, who were not accustomed to managing such market shocks and considering what is happening in China or Japan. While supply disruptions were minimized in the region, if anything, this natural disaster reinforces the need for further storage to be developed in Latin America…”

For regional LPG operators, researchers said the rules of the road have changed. Increasingly, the Latin American region is becoming more dependent on the United States for LPG, Calcaneo said.

“The significant quantities of cheap LPG supplies are coming from the U.S., and it is changing the balance of trade and pricing for both importers and exporters. Mexico and Brazil are net importers, and are importing at Mont Belvieu prices. Argentina, on the other hand, is an exporter of LPG, but it must also compete with the cheaper Mont Belvieu prices.”

Argentina at one time sold LPG to Chile, but Argentina now competes with U.S. exports, Calcaneo said.

Meanwhile, very large gas carriers (VLGC) now are able to traverse the expanded Panama Canal, which enables more LPG volumes to be transported from the United States to Asian markets, as well as the west coast of Latin America and to South America. Chile and Colombia each have plans to add a marine terminal to process LPG imports.

“Currently, 35% of the expanded traffic going through the Panama Canal is LPG cargoes,” Calcaneo said.

“Before the expansion of the Panama Canal, only four of the largest LPG ships were able to transit the Canal, and other VLGCs generally used an alternate route around the Cape of Good Hope,” said IHS Markit’s Scott Gray, senior director, waterborne energy insight. “The Canal expansion was completed in June 2016, and by the end of 2016, nearly all LPG VLGC traffic was moving through the Canal.

“Unfortunately, the VLGC shipping market was already grossly oversupplied, and the significant shortening of the trade route from the U.S. to Asia effectively added even more length to the shipping market.”

IHS Markit expects VLGC rates to remain depressed through at least the end of the decade.

By the time the Panama Canal expansion was completed, nearly all incremental U.S. LPG exports already were being directed to Asia, Gray said. Consequently, expanding the Canal did not change either the source of the global incremental LPG supplies, or their ultimate destination.

However, the expansion reduced the distance traversed and the time required, which impacted the amount of risk inherent in making trades. 

Besides the export/import trade, the Latin American LPG market “is now ripe with inter-regional expansion,” according to IHS Markit.

Any LPG production that exists in the region first is destined for residential and commercial demand because that market pays the most. However, regional demand hasn’t stopped producers from considering other uses for excess NGL production or imports, including use as petrochemical feedstock.

“While a very small percentage of propane is actually being used in the region for petrochemical feedstock, the petrochemical market is seeking alternative supplies for feedstock derivatives, and NGLs from the U.S. are increasingly becoming more attractive,” said IHS Markit’s Rina Quijada,senior director of Latin American petrochemicals and feedstocks research. “The larger ships coming through the Panama Canal create better economies of scale, and those imported NGL cargoes are cheaper.”

While Brazil continues to work on its pre-salt hydrocarbon resources and Argentina is setting the stage for more investment in its natural gas resources from the Vaca Muerta play, those projects are longer-term.

“In the meantime, Argentina, Mexico and Brazil will increasingly lean on the U.S. for additional NGLs” to meet petrochemical production needs, Quijada said.

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