Japan is integrating more Mont Belvieu pricing, the benchmark for U.S. liquefied petroleum gas (LPG), into its domestic sales formula as imports from the United States rose considerably over the past few years, putting pressure on the Arab Gulf contract price.

Around 25-30% of domestic LPG sales are currently linked to Mont Belvieu pricing compared with a few years ago when they were fully priced off the Saudi Aramco Contract Price (CP), Yasuyuki Saguchi from Gyxis Corp. said on Wednesday at the annual IHS Markit Asia NGLs and Naphtha conference.

The pricing switch was made by the Japanese government in 2017 following a sharp increase of U.S. imports as a result of the trade war between Beijing and Washington, leading to China slapping a hefty tariff on LPG purchases from the U.S., said Saguchi, whose company imports 2.8 million mt annually from the United States and the Middle East.

The share of U.S. origin propane reached 82% of the country's total 8.79 million mt imports last year compared with a mere 20% in 2014, while butane reached 35% of the 1.94 million mt purchased in 2019, a hefty jump from 14% in 2018 and 7% in 2014,data from the Japan LP Gas Association showed.

A domestic pricing structure that combines Aramco CP and Mont Belvieu will better reflect the shift in import costs, he added.

The delivered price to Japan from the Middle East and the U.S displayed a higher correlation in recent years, said Saguchi, based on the respective free-on-board (FOB) prices plus freight costs.

The Aramco CP, the cost of FOB cargoes from the Middle East for term lifters, is very much dependent on production levels in that region, Hanwee Ong, marketing manager of Wanhua Chemical Singapore, said on Thursday in a round-table discussion at the conference.

Saudi Aramco set its May CP at $340/mt for both propane, a $110/mt jump from the April CP, as the kingdom and OPEC+ agreed to cut crude production, which was raised further to $350/mt for June amid additional cuts, but this does not necessarily match regional demand dynamics, trading sources said.

Consequently, Chinese importers, for example, who are traditional CP-linked buyers, find themselves paying a smaller premium to the CP as the outright price is raised even in the midst of a regional demand lull.

A south China petrochemical producer that used to pay a premium around $40s/mt to the CP for a 23,000 kt propane parcel for delivery in May and June but paid less than $10 premium for July cargoes, based on OPIS record.

A similar pattern is seen in the Arab Gulf FOB market, the spot resale differentials remained at a double-digit discount to the July CP since the start of the month, based on OPIS data.

With Chinese importers demanding more U.S. cargoes after tariffs were lifted since March following a new trade deal, cash differentials to the CP will be put under increasing pressure, the sources said.

 

--Reporting by Lujia Wang, Lujia.Wang@ihsmarkit.com;

--Editing by Raj Rajendran, Rajendran.Ramasamy@ihsmarkit.com

Copyright, Oil Price Information Service