Prospects of VLGC floating storages dim as Asian LPG flips into backwardation

Asia’s LPG market structure has flipped into backwardation and freight rates are recovering, making it less viable to use VLGCs as floating storages, trade sources said this week.

This was unlike the same time last year, when 14 ships were anchored in the Singapore Strait, amid a contango market.

“It’s become a prompt-month game in this market,” a trader added.

The VLGC Pacific Binzhou has been anchored off Singapore since July 31, due to the contango structure and lower freight rates earlier. The Hong Kong-flagged vessel, with a capacity of 82,198 cu m, departed Ras Tanura port in Saudi Arabia on July 21 and is still anchored at Nipah, Singapore on Tuesday, S&P Global Platts trade flow software cFlow showed.

This was the first time this year that a VLGC was seen used as a floating storage as traders waited for the market to firm before they could sell at more attractive prices, market watchers said.

The Argus Far East Index swaps structure flipped to backwardation for September/October on Friday, reflecting robust sentiment buoyed by increased prompt demand from Chinese propane dehydrogenation plant operators as petrochemical prices remained healthy, and Indian buyers emerging before the onset of winter in Northeast Asia.

The backwardation strengthened on Monday, as arrival timing of August-loading cargoes from the US were deferred to October, as sellers changed their route to the longer Cape of Good Hope from the shorter Panama Canal, trade sources said.

The re-routing was due to the contango structure earlier in the year, traders said. “Even [a] few dollar[s] contango made sense to change the route under the weak freight market,” a trader said.

The VLGC freight rate on the Houston to Japan route via the Panama Canal was assessed at $42/mt Monday, compared with $39/mt earlier this month which was the lowest since Platts started the assessment on July 1, 2013.

The spread between prompt-month and second-month Saudi Contract Price propane swaps stood at 25 cents/mt for September/October Monday, compared with minus $7/mt on August 15 last year.

However, the backwardation is not expected to steepen further as the market structure for US Mont Belvieu propane is flat going forward and only slightly backwardated now, a trader said.

The Mont Belvieu non-LST propane September/October spread was at 65 cents/mt Monday, Platts data showed.

“If we get more backwardated then people will cancel US liftings and the East will tighten,” a trader added.

Prompt-month September CFR Japan propane prices have firmed up this month, to $462/mt Monday from $452/mt on August 1, Platts data showed.
Source: Platts