China mulls trade war on propane

How hard would tariffs hit LPG trade?

There are two cases to be considered here: contracted and spot LPG purchases by Chinese buyers. In either case, the proposed tariff would make US LPG more expensive than supply from other countries.

We believe that Chinese buyers will have to honour their long-term contracts or suffer heavy penalties. Breaking their agreements would also seriously harm their credibility in the international market. A less damaging course would be to swap their US-origin LPG cargoes with Middle East supply going to other countries, most likely Japan or South Korea. Those cargoes would still be taxed at 1%.

In case of spot demand, Chinese buyers would have the option to source it from anywhere else and Iran in particular would be a potential supplier, considering it has a good relation with China and would relish the chance to profit at America’s expense.

How will it affect LPG shipping?

The announcement had no big immediate impact on the VLGC market as the players shrugged it off as a shallow threat. Rates for VLGCs have already fallen alling since mid-March, but this was the normal, seasonal tapering of winter demand. Beijing’s announcement did not add any volatility to the rate slide.

Nevertheless, if the Chinese government goes ahead with the 25% tariff, the net result will be negative for LPG shipping, especially for VLGCs. Other targeted commodities can take comfort in the likelihood of China sourcing replacement supply from more distant destinations. But if China buys its LPG from anywhere else, this would mean a decrease in tonne-miles and would bring down the demand for VLGCs. For instance, the voyage distance from Iran is almost half what it is from the US, which would mean a sharp and sudden decline in tonne-mile demand.

The recent confrontation between the US and China could not have come at a worse time because the LPG shipping market is already very weak (except for small LPG carriers). In the current spot market, VLGCs are not even covering their operating costs. Although we have been forecasting a recovery in the LPG market from the second half of 2018, the action threatened by China would kill off any chance of a recovery.

Moreover, if the present confrontation blows up into a full-scale trade war, there would be an indirect spill-over into the LPG shipping market through falling GDP and a wider macroeconomic slowdown.