The recently completed expansion of the Panama Canal, which now allows transport of greater, cheaper volumes of liquid petroleum gas (LPG), combined with the opening of the Mexican energy industry to private investment, has dramatically shifted the trade balance and altered how regional LPG companies must compete, according to new analysis from IHS Markit (Nasdaq: INFO), a world leader in critical information, analytics and solutions.
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Latin America LPG Supply, Demand & Imports. Source: IHS Markit
LPG (a blend of propane and butane) is a fuel used primarily for residential and commercial cooking and heating in Latin American and other regions, including Asia and Africa. However, it, along with other natural gas liquids (NGLs), can also can be used as feedstocks for chemical 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 Adrian Calcaneo, senior consultant and the lead for the Latin America and the Caribbean NGL Service at IHS Markit. “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 (Texas) 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.”
These major market shifts for this critical fuel will drive much of the discussion at the upcoming Latin America LPG Seminar and Workshops 2017, November 7-9, in Panama City, Panama. Hosted by IHS Markit, the event includes three workshops and a host of IHS Markit experts and industry leaders addressing the LPG market outlook, as well as the Panama Canal expansion and its impact on global trade patterns. The event will also explore regional market implications for LPG, both as a commercial and residential fuel source, but for other potential applications, including as feedstocks for petrochemical production.
Other market impacts, such as Hurricane Harvey, which affected approximately 45 percent of the natural gas liquids (NGLs) fractionation capacity at Mont Belvieu, will be discussed at the LPG seminar. The hurricane also caused refineries throughout the Texas Gulf Coast to be either shut down or operated at reduced rates for an extended period, and marine exports of NGLs were halted during the storm, IHS Markit said.
“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, and these are some of the themes we will explore at the conference in Panama.”
For these regional LPG companies, it has truly changed the rules of the road, which is why IHS Markit is offering some critical upcoming workshops at the LPG Latin America conference on market dynamics, pricing and waterborne trade, Calcaneo said.
“Increasingly, the region is becoming more dependent on the U.S. for imports of 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, he said, used to sell LPG to Chile, but now competes with exports from the U.S. However, the bigger ships now coming through the expanded Panama Canal are enabling more LPG volumes to be transported from the U.S. to Asian markets, but also to the West Coast of Latin America and South America, particularly to Chile and Colombia, which each have plans to add a marine terminal to process LPG imports, Calcaneo said. “Currently, 35 percent 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 (VLGCs) were able to transit the Canal, and other VLGCs generally used an alternate route around the Cape of Good Hope,” said Scott Gray, senior director, waterborne energy insight at IHS Markit. “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.
Meanwhile, 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, the expansion of the Canal did not change either the source of the global incremental LPG supplies, or their ultimate destination. However, it did reduce the distance traversed and the time required, and therefore, impacted the amount of risk inherent in making trades.
Aside from imports and exports to other regions, the Latin American LPG market is now ripe with inter-regional expansion, IHS Markit said. “Now companies that grew to capacity in their native countries have expanded to other countries in the region, so understanding market dynamics and the competition is something our customers are asking from us that we are providing through our Latin America Natural Gas Service,” Calcaneo said.
Any LPG production that exists in the region will go first to residential and commercial demand because that market pays the most, it hasn’t stopped regional producers from considering other possible uses for excess production or imports of other NGLs, including use as petrochemical feedstocks, IHS Markit said.
“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 Rina Quijada, Ph.D., senior director of Latin American petrochemicals and feedstocks research at IHS Markit. “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 greater investment in its 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 their needs for petrochemical production, which we will discuss more fully at the LPG seminar.”
To speak with Adrian Calcaneo, Scott Gray or Rina Quijada, please contact Melissa Manning at email@example.com. For more information on the IHS Markit Latin America LPG Service or the Latin America LPG Seminar and Workshops 2017, please contact firstname.lastname@example.org.
About IHS Markit (www.ihsmarkit.com)
IHS Markit (Nasdaq: INFO) is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 key business and government customers, including 85 percent of the Fortune Global 500 and the world’s leading financial institutions. Headquartered in London, IHS Markit is committed to sustainable, profitable growth.
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