The 82,000 cbm Clipper Sun marked the first VLGC to load on the USGC for delivery in India, as she departed Houston on March 6th, 2019 and arrived in the Indian port of Ennore on April 11th where a part-cargo was discharged. The remainder was later delivered to the Indian port of Haldia. Based on IHS Markit Waterborne data, there were 17 ships (including 15 VLGCs) that sent US LPG to India in 2019, routing via both the Suez Canal and the Cape of Good Hope.

This is the first time that the US has included India as a destination for exported LPG. It is noteworthy because India is in the backyard of, thus traditionally solely reliant on, LPG from the Middle East. The evolution of global trade economics led to this new trade route, where several incidental and structural factors helped tilt the balance. The trade war between the US and China was one of the major catalysts. As China's LPG import requirement grows, so does the US' export need, and 3rd party markets are now increasingly involved to enable cargo swaps in order for Chinese importers to avoid a full tariff hit. Japan and Korea have served as the major swap markets to date, but as these countries' potential to play such a role starts running out, India and the Southeast Asia become the next swap markets owing to their robust demand growth. Other factors that helped widen the Middle East vs. US price differential, either by depressing US prices or strengthening Middle East prices, also incentivized India to seek US LPG supply. For example, OPEC oil production cuts created tightness in spot LPG supply, which coincided with waterborne export issues in the US (fog, explosion and fires at the Houston Ship Channel), which collectively caused the Middle East vs. US price differential to reach around $200/ton during most of April 2019. The supply tightness following the drone attack on Saudi oil infrastructure in September also pushed up Middle East prices. The resulting price differential created an opportunity for India to import from the US at a lower total delivered cost than from the Middle East, despite the higher freight costs from the US to India.

Figure 1 below compares the Middle East and USGC propane price differential, with the estimated logistics breakeven, the minimum price differential needed to overcome the freight disadvantage for US cargoes to move to India. Also plotted is the number of cargos moving from the US to India each month. Whenever the price differential moved resolutely above the breakeven level, e.g. during April/May and once again in October, the US exported LPG to India, as Indian buyers took advantage of the favorability of importing from the US, as opposed to from the Middle East.

The new US to India LPG trade route is likely to stay going forward, for several reasons. Even though IHS Markit recently revised down the US upstream production outlook, we still expect US LPG production to increase by about 250 kbpd over the next couple of years. Nearly all of this incremental production needs to go to exports for the market to clear. On the demand side, India is arguably the second most important market after China, in terms of driving LPG demand growth, especially for butane consumption given the country's large butane-rich domestic sector.

The US-China trade war has caused Chinese importers to secure term contracts with the Middle East suppliers, concerning the high import tariff and potential trade policy risks associated with the US supply. For example, Saudi Aramco's LPG term export volume is reportedly to have reached around 9 million tons in 2019, which is about half million tons higher than 2018 or 3 million tons higher than the 2013/14 levels. The trend of increasing term volumes, combined with the ongoing OPEC oil production reduction, has essentially reduced the availability of spot LPG volumes, or 'spare capacity', using the crude oil market analogy. The thinner cushion is likely to cause higher LPG price volatility and overall higher cost of Middle East supply. This situation might not quickly unwind even if the US-China trade war gets resolved. As such, it would only make sense for India to diversify its source of supply and lower total import costs, by at least occasionally importing from the US.

Leverage IHS Markit proprietary supply, demand and price forecasts for NGLs (ethane, propane, normal/isobutane and natural gasoline) to make better investment and purchase decisions.
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Posted 10 January 2020 by Yanyu He, Executive Director, Natural Gas Liquids (NGL) Research and Consulting, S&P Global Commodity Insights

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.