China's state-run Wanhua Chemical has started to think beyond just running the biggest PDH plant it owns in China's Shandong province and is now looking to exploit its twin advantages of strategic location and owning key facilities to trade LPG on the domestic market.

The company, which plans to more than double its LPG imports this year, says it will be keeping an eye out for arbitrage opportunities to sell cargoes in China to grow its domestic trading business over the next few years.

"We plan to import around 1.5 million mt of LPG in 2016, which is around two to three LPG cargoes a month, a source with the company said, adding that the company imported around 600,000 mt of LPG last year, as their PDH plant started operations last August.

Wanhua Chemical's PDH plant, in Yantai in Shandong province, currently has propane and butane processing capacities of 900,000 mt/year and 600,000 mt/year respectively.

"Since our PDH plant is not expected to run at full capacity for the whole year, there will be some spare cargoes for reselling in the domestic market," the source said.

"In addition, there are few import LPG terminals and LPG storage facilities in northern China. Besides Tianjin Bohai Chemical, only we have large LPG storage and docks that are capable of receiving VLGCs, which is an advantage for us," the source said.

Wanhua Chemical has a total LPG storage capacity of nearly 1.2 million cu m, which include an underground refrigerated cave and high-pressured spherical tanks on the ground. In addition, the company has three docks capable of berthing 100,000 dwt liquid chemical vessels.

The source added that many companies had approached Wanhua about renting LPG storage, but that they don't have any intention of renting it out.

SUPPLYING TO LOCAL PLANTS

There are many petrochemical plants in Shandong, which mainly crack etherified butane and isobutane.

However, only a few plants use imported propane and butane as feedstock, and they include independent refiners Chambroad Petrochemical and Shenchi Petrochemical, according to a second source with Wanhua.

But demand for imported LPG from these plants is not small, with both Chambroad and Shenchi in Shandong operating a 250,000 mt/year mixed dehydrogenation unit and a 400,000 mt/year mixed dehydrogenation unit, respectively.

"Chambroad and Shenchi can either buy pressurized LPG cargoes from South Korea by barge, or buy imported LPG cargoes from Tianjin Bohai Chemical or from us by truck," the second Wanhua source said.

After the crude oil price plunged last year, imported LPG became cheaper than domestic, providing a good opportunity for LPG importers to sell imported cargoes on the domestic market, according to market sources.

TERM AND SPOT CARGOES

For this year, Wanhua Chemical has secured around half of its LPG import needs through term contracts, and buy the other half on the spot market, the first company source said.

The Shanghai-listed company signed term contracts with Saudi Aramco and Qatar's Tasweeq early this year, making it the China's first LPG end-user signing direct term contracts with Saudi Aramco, as well as Tasweeq, according to the source.

Wanhua is also the first Chinese company with the right to recommend a monthly contract price to Saudi Aramco, sources from the two companies confirmed.

According to Aramco, their buyers who have signed term contracts have right to recommend a monthly contract price for them.

Saudi Aramco's first LPG cargo through a direct sale to Wanhua arrived in Yantai on May 16.

The volumes of Wanhua's one-year LPG term contracts with Aramco and Tasweeq are expected to be around 200,000-250,000 mt with each company, totaling around five to six cargoes, respectively, market sources said.

"We have completed all term contract negotiations this year," the first Wanhua source said.

Wanhua boosted its LPG imports to 133,059 mt in March, compared with no imports in February, customs data showed.

HIGH PROCESSING MARGINS

Chinese PDH plants are estimated to have been enjoying high margins since earlier this year for producing propylene, their key output, which prompted them to import and process more propane, according to market sources.

"Processing margins for PDH plants are still good now. According to a calculation by a Singapore-based broker, the processing margin for PDH plants is around $200/mt now," the second Wanhua source said.

"The propylene price is quite good now, and it is expected to increase further," the source said, adding that Tianjin Bohai Chemical had recently shut for maintenance, which is expected to support propylene prices in Shandong.

Wanhua has been running at around 70% of its capacity in recent months due to problems with the PDH unit.

"The propylene market is very small. Any supply increase will easily affect its price," the source said, but added that Wanhua's propylene production was mainly used by its own downstream units.

–Analysis by Cindy Liang, newsdesk@platts.com
–Edited by Sambit Mohanty, sambit.mohanty@spglobal.com, and Jonathan Dart, jonathan.dart@spglobal.com

http://www.platts.com/latest-news/oil/singapore/analysis-chinas-wanhua-eyes-opportunity-to-expand-27597073