Li Tie, Tianjin Petrochemical Transportation & Sales Center

Characteristics of economic operation in LPG industry

1. Capacity and output are increasing year by year, but at a slower pace

According to statistics, China's refining capacity kept growing from 2016 to 2020 and the capacity reached 944 million t/a in 2020, up by 2.85% year on year; crude oil processing capacity reached 673.408 million t/a, up by 3.8% year on year. As a by-product of oil refining, LPG output increased in line with the rise of crude oil processing capacity. However, producers continue their progress towards constructing refining and chemical integration projects, so they keep more and more resources for captive use and the supply is decreasing sharply these years. As the world's largest LPG consumer, China is importing a large number of LPG. According to the customs data, China's LPG imports increased from 16.125 million tons in 2016 to 19.6585 million tons in 2020, with an average growth rate of 21.91% during the five years.

China's LPG consumption has steadily increased during the period, as mainly driven by the growth in chemical industry. The apparent consumption of LPG in China increased from 49.706 million tons in 2016 to 61.5487 million tons in 2020, marking an increase of 11.8427 million tons or 23.83%. Table 1 shows the supply and demand of LPG in China from 2016 to 2020.

In recent years, enterprises carry out delicacy management to promote their transformation and upgrading amid the increasingly fierce market competition, and as a result, the amount of LPG commodities is shrinking year by year. The civil demand for LPG is decreasing, as natural gas is increasingly replacing it. However, with the expanding deep processing capacity, the demand for LPG from chemical industry is strengthening.

The state-owned enterprises were the main driving force behind the domestic LPG market direction in 2020, as their capacity hit 4.2633 million t/a, accounting for 68% of China's total LPG capacity and 13.79% of the national market. Table 2 shows the breakdown. However, with the rise of regional private refineries, such as Dalian Hengli and Zhejiang Petrochemical which have put their units into operation, the market competition is becoming increasingly fierce, and the whole industry is gradually developing towards deep processing and fine chemical direction.

China's LPG production largely increased from 2016 to 2020. The output of LPG in 2020 rose from 40.571 million tons in 2019 to 42.8381 million tons, up by 5.59% year on year. However, the year-on-year growth rate decreased, which was mainly due to the outbreak of Covid-19 that had a significant impact on both domestic and foreign markets, with demand stuck in a decline and even showing a negative growth in the first half of the year. In addition, a correction in the cost of feedstock markets and imported gas amid widely fluctuating international crude oil prices hampered transactions of domestic refineries in 2020. Accordingly, the price spread in the domestic market was narrowed and the profit margin was reduced, which seriously kept traders from entering the market. Therefore, market activities decreased in the year. In 2020, Sinopec’s output accounted for 37% of the national total, while the output of PetroChina and its regional refineries took up around 26%.

2. The apparent consumption is on the rise, and the dependence on imports is high

Domestic LPG consumption has been increasing in recent years. The apparent consumption of LPG was at 61.54 million tons in 2020, an increase of about 1.7 million tons compared with that in 2019. This was mainly attributed to the increasing domestic end-user demand, especially after the consecutive start-up of downstream deep processing PDH units. However, the growth rate of domestic consumption in 2020 was slightly lower than that in previous years because the consumption of civil fuel decreased significantly in the first half of the year for the pandemic. In addition, the import volume in 2020 decreased by 4.96% compared with that in the previous year.

This snapped the growth of LPG imports in previous years. Before 2020, the growth pace had slowed down due to the bigger import base. The import volume only reported a slight rise in 2019 and turned into a negative growth in 2020. 

China's LPG import dependence has been maintained at above 30%. Despite increasing domestic output year by year, the growth of demand is outpacing that of supply, so import volume is needed to cover the gap. Furthermore, with the increasing adoptioin of alkane dehydrogenation units in recent years, China's demand for imported propane is growing significantly, so the alkane dehydrogenation units will be the main driving force of the increase in China's LPG import volume in the future.

3. The market is choppy, with the prices closely linked with international crude oilprices

The prices of LPG in China were ranged from RMB2 700/ton to RMB5 300/ton from 2015 to 2021. There were many factorsaffecting the prices, such as international crude oil prices, seasonal concerns, domestic supply and demand, import and export, and inventory.

During the period, the lowest price was seen in the second quarter of 2020, as the LPG industry succumbed to the headwinds throughout 2020, including the outbreak of epidemic globally and the impact of the "Black Swan". The highest point occurred in the third quarter of 2018, when the prices of crude oil soared to more than US$80/barrel.

In addition to the international crude oil price trend, LPG prices are also affected by the seasonal characteristics. Winter is the traditional peak season, while summer is the traditional off-season. According to the data in recent years, the price spread between the two seasons could reach as wide as RMB1 000/ton.

Market status and development trend of LPG’s downstream sectors

The domestic demand for LPG, mainly from civil utilization (household, catering) and deep processing sectors, was on the rise from 2016 to 2020. In 2020, however, the domestic demand for civil use decelerated due to the outbreak of COVID-19. The catering industry also weakened in the first half of the year because of the virus, which slowed down the growth of demand from civil sector. The second half of the year saw recovery. At the same time, due to the increasing demand for medical supplies, the demand for plastic products grew. In addition, some PHD units were built and put into use in 2020, leading to a remarkable increase in the demand for deep processing of LPG

Forecast of domestic LPG market and analysis of influencing factors

On the supply front, the domestic crude oil processing capacity keeps increasing, and as a result, the supply of LPG is expected to continue its growth in the future. However, most of the refining and chemical integration units are equipped with downstream deep processing units, so the actual availability in the market is likely to be largely flat. Inaddition, with the groundbreaking of many domestic PDH projects, the demand for propane will keep rising.

Demand is expected to be stronger than the same period of last year, as the supervision and control over thepandemic are more experienced in China. The consumption of catering will also have a significant improvement because needs for catering and shopping are recovering from the virus in 2021. In addition, more and more domestic PDH plants will be put into operationin 2021, which will also increase the consumption of imported propane.

The apparent consumption in China's LPG market will continue to rise. Alkane deep processing will be the main development direction in the future, and China's dependence on imported propane is expected to further improve.

The prices of LPG are unlikely to lose much ground due to the strong forecast of international crude oil prices, but factors such as seasonal characteristics as well as supply and demand relations will pose an impact on the levels. In a nutshell, the average price in 2021 will be higher than that in 2020.