European LPG sellers are looking for new demand, particularly in growing consumer markets in North and West Africa, because of increasingly unpredictable consumer demand in Northwest Europe and a shifting seasonal structure that leaves petrochemical buyers holding more of the cards.
Morocco is in the spotlight as the largest LPG market in the Western Mediterranean, importing 2.2 million mt of butane a year, while also being easily reachable from major supply hubs in Northwest Europe, southern France and Spain.
The expectation that demand will continue to grow, paired with expectations that the government will further liberalize its import system, has attracted a host of new players all vying to import butane.
That additional demand provides options for the butane market in Northwest Europe even when blending demand falters, market sources said.
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“Without that you would have a depressed market,” a market source active in the Western Mediterranean said.
New sources of demand also include power generation and autogas, a mixture of propane and butane that has typically been cheaper than gasoline and is widely used in Eastern Europe and the Eastern Mediterranean, including Ukraine and Turkey.
Other major players have increasingly looked to West Africa, particularly Ghana, Cote d’Ivoire and Nigeria, where growing populations and government support for cleaner-burning consumer fuels is helping support LPG demand, even as lagging infrastructure for both ports and distribution throughout the country has frequently stymied the pace of growth, sources said.
“Every major trader is looking at the African market, [and] have been for years now,” said another market source. “That is where the distribution demand is going to come from.”
However, North Africa, while a growing market, has also been a major source of LPG demand for some time, and an increasing number of traders and importers serving the Moroccan and Tunisian markets has also brought more competition.
The pace of growth in West Africa — while potentially massive, in Nigeria in particular — has frequently been hamstrung by logistical challenges.
Those include the difficulty of offloading specialized LPG vessels in some major West African ports, and the difficulty of distributing safe and reliable LPG canisters to the consumer market outside of the major urban hubs. Overcoming those obstacles would require not just private-sector investment, but political coordination.
PETROCHEMICALSINCREASINGLY DOMINATING SPOT MARKET
The need for new sources of demand was brought into sharp relief this winter, as the typical seasonal structure flipped and the European LPG market became increasingly dependent on spot demand from an unlikely source: petrochemical companies.
The market has long relied on regular, seasonal patterns to define the highs and troughs of prices throughout the year. While petrochemical companies have long been in a fixture of the European LPG markets, their arrival has typically been predictable: the petchems come in the spring, and leave in the autumn.
In past years, winter sources of demand — as a heating fuel and a winter-quality blending component for gasoline — tailed off, and prices fell, making propane and butane competitive alternatives to naphtha, traditionally the main feedstock for Europe’s steam crackers.
This year, that changed. A late European winter undercut heating demand, and a closed arbitrage from Europe to the US cut off the continent’s typical outlet for excess gasoline. On the spot market, prices fell sharply, and petrochemical buyers stepped in to take advantage.
The flexibility of their crackers allows petrochemical companies to take advantage of price swings and to be strategic about when they buy, setting a floor for demand.
US SHALE BOOM RESHAPES EUROPEAN MARKET
However, the beginnings of this trend go back further than this winter. As the shale gas boom in the US produced a surge of new product, the market needed to find demand to soak up the excess, and the US became a major exporter.
From 2012 to 2017, exports increased more than sixfold to nearly 447 million barrels, according to the data from the US Energy Information Administration. Propane makes up more than two thirds of the total, with the remainder consisting of butane, ethane and natural gasoline.
In 2012, US exports to the EU were 8.57 million barrels, according to the EIA. By 2017, exports from the US had nearly quadrupled to about 40.1 million barrels, even though EU demand overall grew by less than a third over the same period.
The result was that US product took a growing market share in the EU. In 2012, US product was just 3% of total demand, according to JODI and EIA data. By 2017, US product accounted for 11%.
The influx of LPG could have meant that propane and butane were well placed to take up more of the petrochemical companies’ cracking pools, at the expense of naphtha.
But the shale boom also brought plentiful supplies of ethane — another, cheaper, feedstock — which took up a greater proportion of the overall supply. In 2014, naphtha made up 80.5% of the total cracking pool, while LPG made up 16% and ethane made up just 3.5%, according to data from Platts Analytics.
Three years later, LPG’s proportion of the total pool had stayed virtually the same, while ethane had risen to 5.8%, at the expense of naphtha.
As a result, LPG is unlikely to become a purely petrochemical market in Europe any time soon. The EU as a whole, is still dependent on the consumer heating market, gasoline blending, and autogas for more than two-thirds of total demand, according to data from JODI and Platts Analytics.
To compete as a feedstock, propane and butane will by definition need to remain at large discounts to naphtha, resulting in lower winter prices than in the past.
To become even more attractive, LPG would have to sink still further, to compete with ethane — an unlikely prospect, market sources say, due to the scale of the investments European companies have made into transporting and cracking ethane.
