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Light at the end of the tunnel?

Can you remember those “so-called” Chinese spy balloons that apparently blew off-course, and ended-up in America’s backyard, before being unceremoniously shot-down? Well, that was probably the start of the U.S./ China logjam, a few off the cuff remarks about Taiwan by the U.S. President followed, talk and concern about a rise in military tensions over Taiwan, a Chinese President cozying-up to President Putin, and most international commentators were predicting another cold war, as well as potential military sparring and political accusations in the months ahead. So, everyone’s a bit surprised that Messrs Biden and Xi managed four hours of talks at the Asia-Pacific Economic Cooperation Forum (APEC) in San Francisco. No-one’s saying there was a lot of agreeing going on, but at least they were talking about matters that should be talked about by the two great powers of our world. It was like a release valve for those worried they wouldn’t talk or worse. They agreed that their militaries should talk, that the chemicals used for the production of fentanyl and the dangers of AI ought to be identified and where possible controlled. There was agreement to triple worldwide renewable energy capacity by 2030, talk about Ukraine, Hamas/ Israel, Iran. Yes, there was ground covered that needed to be covered. But what about the Chinese economy, ultimately that’s what drives the energy markets these days, well, it didn’t seem to get much of a mention. Therefore, we’re still in a worrying phase!

What’s next on the agenda, well it’s COP28 of course in Abu Dhabi in a week or so. But forget all the good words, warnings and political positioning, the actual renewable industry is anything but healthy! Companies in the wind-power and solar sections are seeing their shares plummet. In Germany we’ve spotted a huge government bailout of the wind power subsidiary of Seimens Energy, and many others worldwide are significantly suffering. Rising costs are ominously hitting the wind, solar and EV sectors, as the time-lag between demand for the resources required are not matched by supply. Companies are starting to look for even greater government subsidies as projects get cancelled all over the place. There seems to be a missing link in the confidence of investors and consumers alike. Take the EV market where everyone’s talking about the lack of charging capacity as well as the electricity supply itself, let alone all the tons of copper we will need to extract from the ground to tick the conductivity box. On the demand side it’s not been what any COP28 fan wants to hear. Take Germany, where you’d expect a rush to implement a renewables strategy, where doubling, tripling of demand for solar installations talked about in 2023, has actually seen demand fall in the last quarter. So, this magical word “transition” away from fossil fuels, including LPG, is again going to have to be addressed, even for a renewables industry benefitting from generous government subsidies.

Only a short while after the EIA published its long overdue crude oil inventory report, showing an 18 MM Bbl build over the two-week period, oil prices slid by more than 3%. Brent had distanced itself under the $80/ Bbl level only to scramble back by Friday as a few positions were closed, and profits taken. Again, China got the blame, this time data showing lower running rates of Chinese refineries in October. Least we forget, China is the largest importer of crude oil in the world, and its economy is not as healthy as President Xi or market analysts would like. Throw in some weak U.S. industrial and manufacturing numbers, a rise in jobless claims, and the EU dropping their growth forecast from 0.8% to 0.6%, and the market was certainly on the sell side most of the week. Even an announcement from Washington that the enforcement of Iranian sanctions would be beefed-up did very little to stop oil prices falling to levels not seen since July this year. No wonder OPEC’s research body tried to bolster demand numbers and dismiss all this negativity!

I’m sure you know by now that it’s raining in Panama, but it’s far too early to shout whoopee if you’re a charterer. Again, the Panama Canal is causing the LPG industry major trials and tribulations in trying to plan what to do next. On the one-hand if you have a Panamax VLGC, or an accredited customer code proving your slot allocation, you’re to a certain degree laughing, especially to the bank, as premiums continue to be paid to get a degree of programming certainty. But for others, especially the traders, it’s time to scratch their heads a little more. And this scratching may bring some light at the end of the tunnel.

It’s all again about the Chinese market, at least it starts there for me. I’ve been saying in recent “Simon Says” how uninspiring the Chinese market is currently, and that opinion has certainly not changed one iota. Even though the drop in crude oil prices, and subsequent dip in the flat price of LPG should bolster demand, in China it hasn’t. The market is so skewed towards propane feedstock demand for PDH operations, therefore negative margins are unsustainable for long periods without run-rate reductions, or even shut-downs, whether for maintenance or simply to cut costs. Throw in a lack of winter related demand, or even stock purchasing, not that I would be expecting the weather to be that cold yet anyway, and the outlook is bleak, and sentiment becomes increasingly bearish. So, even with cargo arrival delays clearly on everyone’s lips, the market has still gone on a downward wander. Paper cash differentials have seen the front of the curve slip from nearly a $20/ Mt premium to below $10/ Mt, with the next six months flattening, showing a lack of perceived demand coming through for what appears to be less and less cargoes arriving. Even second half December Window cargoes have gone negative, even mid-single digit discounts were reported to have been done off Window. Then it’s no surprise the ARB took an unexpected beating, getting squeezed over $40/ Mt in the week. And here’s the “light”.

The dreaded word “Cancellation” is back again, and it’s two pronged now, as increases in freight costs (around $340 – 350/ Mt Houston to Ningbo via Suez) make netback economics look horrible. Forget taking off the Houston to Chiba rate via Panama in your netback calculations if you can’t go through the Canal! The result is that traders are backing away from Houston FOB cargoes, cancelling stems and starting to re-offer their ships on the market. It’s beginning to have an impact on the second half of December arrival list, still a little smoky as to what is actually heading West or East, but there’s certainly more ships appearing. In addition, it’s forced the re-sale terminal fee premiums to halve from the 15c/g of a week or so ago, with a cancelled cargo subsequently resold closer to 7.5 c/g. Then there’s the murmurings of “Gasvoy” cancelling with ships missing dates here, there and everywhere. The terminal fees will ultimately take most of the shock, but in the coming weeks freight will also have to find lower fixing levels. For Asia to get its mojo back, well this might not happen for a while, probably not until the New Year and a batch of shivering weather.

Now the winter is traditionally the time for propane but also keep an eye on butane. Yes, the premiums in the Middle East are only just north of $10/ Mt, but demand from India and Indonesia is very strong for split cargoes that are now much harder to get hold of from the Middle East producers. As iso-butane in the U.S. scorches above 110 c/g, it’s pushed export butane FOB prices higher, simply as more normal butane needs a squeeze of iso in it to meet international buyer’s requirements. In addition, the differential of normal versus iso is cranking up normal butane demand for isomerisation. If you do the maths, an export tank or two of butane going to set you back some $80/ Mt more than propane, not good if you’re selling into a CP market!

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