China petchem plants face shutdown as tariffs on US LPG loom

By Chen Aizhu, Trixie Yap, Mohi Narayan

SINGAPORE/NEW DELHI, April 9 (Reuters) - Chinese petrochemical makers that buy $11 billion worth of U.S. liquefied petroleum gas (LPG) annually are poised to cut output or shut for maintenance in coming weeks as Beijing's retaliatory tariffs on U.S. imports drive up costs, industry insiders said.

The industry of over 30 propane dehydrogenation (PDH) plants relies heavily on U.S. LPG, or propane, for processing into plastics intermediary propylene.

Armaan Ashraf, global head of natural gas liquids at consultancy FGE, said tariffs could force Chinese PDH operators to cut average operating rates by nearly 15 percentage points and curb demand for propane from steam crackers and PDH plants by at least 500,000 metric tons per month.

The tit-for-tat trade war that saw China on Wednesday escalate retaliatory duties on U.S. imports to 84% threatens to put a Chinese PDH sector already struggling under thin margins for two years into what an east China-based executive with a major PDH plant called a "harsh winter".

The executive, declining to be named due to company policy, expects overall PDH plant utilisation rates to drop below half of total industry capacity as early as May.

China's 731,000 bpd-PDH sector operated at nearly 70% of capacity in March, down from a peak of around 85% in 2020, according to industry insiders and FGE, with plants losing an average of 480 yuan ($65.31) per ton in the week of April 6, deepening from the week ago's 384 yuan, LSEG Oil Research analysts said.

Last year, China bought a record 17.3 million tons of U.S. propane, or 550,000 barrels per day, 60% of China's total imports of the gas liquid.

The trade war during President Donald Trump's first term brought China's LPG imports to a halt for nearly two years, but the industry was much smaller then, and operators used cargoes from the Middle East as replacement.

Fuelled by cheap U.S. propane, a by-product of the shale gas boom, PDH plants mushroomed on China's east coast over the past decade, leading to overcapacity amid weakening demand for propylene, said traders and the executive.

Prices of U.S. propane for Asian exports, or the Far East Index assessment, fell nearly 30% to $425 per ton this week as traders factored last Friday's retaliatory tariffs by Beijing. In physical shipments, it's unclear whether U.S. suppliers and Chinese buyers can agree to lower prices to absorb the shock.

While some buyers may be able to re-negotiate with suppliers if contracts permit, others, with term supply deals, may be forced to resell to other Asian buyers.

A growing price gap limits Chinese plants' ability to swap U.S. shipments for rival Middle East barrels that are mostly destined for South Korea and India, traders said.

"The market is still in massive shock and confusion, with buyers and sellers struggling to reach a physical deal. The tariffs have thrown the pricing structure out of the balance," said a veteran trader.

($1 = 7.3493 Chinese yuan renminbi)