Moneycontrol Pro Panorama | LPG a surprise winner from tariff war

The LPG market is experiencing higher selling pressure compared to CNG.

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India was expected to benefit from the US-China tariff war by stepping in as an alternative supplier of goods to the United States. While some advantages are beginning to emerge, with various sectors experiencing an increase in order flow, the indirect benefits from the tariff war are also starting to materialise.

The increased tariffs imposed by both countries on each other have disrupted the energy market. As a result, crude oil prices have fallen below the $60 per barrel mark, largely due to a production hike by the OPEC+ oil cartel. A similar trend is also evident in the gas market, where both liquefied petroleum gas (LPG) and compressed natural gas (CNG) are under selling pressure.

The LPG market is experiencing higher selling pressure compared to CNG. LPG is primarily produced during the fractional distillation of crude oil while CNG is mainly extracted from oil and gas wells. Unlike CNG, where production can be capped at a gas well, LPG production cannot be easily controlled. If LPG production needs to be reduced, the entire refinery would have to shut down, or the excess LPG produced would have to be flared, leading to significant losses for refiners.

This urgency to sell LPG has caused a shakeout in the market. In India, 80 percent of LPG requirements are met through imports from Middle Eastern producers whereas China sources about 50 percent of its LPG from the US. However, with the increase in tariffs, importing LPG from the US is no longer viable.

Middle Eastern suppliers have seized this opportunity to sell their products to China, where prices are higher. In contrast, India benefits from the lower rates at which US producers are willing to sell.

Transportation is a significant cost in the gas market. Due to the tariff war, LPG is now available to Indian importers from the US at the freight-on-board (FOB) price it received from the Middle East. Reports indicate that starting in June, the Abu Dhabi National Oil Company (ADNOC) will begin replacing some of the LPG it supplies to India with cheaper US cargo through its trading units.

In an unusual move, Indian refiners have requested Middle Eastern suppliers to swap a portion of their term supply for US LPG. The Middle Eastern suppliers are more than willing to accommodate this request as they can sell their gas to China at a higher price.

In addition to price arbitrage, India benefits from imports by leveraging them in tariff negotiations. The Trump administration has criticised India for imposing high tariffs on imports from the US, for non-tariff barriers, and for maintaining a significant trade surplus.

LPG imports from the US can help address the trade surplus issue. Indian refiners have already signed long-term contracts with US suppliers to acquire 10 million tonnes of LNG over the next five years. Additionally, US LPG imports are expected to narrow the gap further. Based on signed agreements, supplies from the US are projected to increase to 230,000 tonnes in May, compared to 24,000 tonnes from January to April.

While the deal is advantageous for India, the opportunity may be short-lived. Prices are likely to change as the tariff war between the US and China is resolved and tariffs are reduced. Until then, India can capitalise on the current trade imbalance.

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