US-China tariff war collapses trade in key petroleum product

Singapore - It’s been just days since China responded to US tariffs with its own set of eye-watering levies, but one corner of the petroleum market is already in crisis as bilateral trade collapses between the two heavyweights.

The price of propane, a type of liquefied petroleum gas (LPG), has plummeted in the US because selling to China, its biggest customer after Japan, is no longer viable. Chinese buyers are scurrying to find alternative sources of the fuel, which is used for heating and plastics, but are getting gouged by traders taking advantage of their distress.

The two countries should be snug bedfellows in the LPG market. US production has soared thanks to the shale revolution, and China has capitalised by ramping up its plastics-making capacity. Until last week, those plants were feeding an export machine which was heavily dependent on American consumers. That has all now been trampled underfoot by the rapid escalation in tariffs.

Chinese propane importers have been frantically trying to offload US cargoes they can no longer afford in exchange for other supplies. But they have been offered switches at around US$130 a tonne, according to traders, which is about four times what they were willing to pay. 

The buyers most affected are the propane dehydrogenation (PDH) plants that turn the raw material into propylene, a building block for plastics. The sector’s already operating on razor-thin margins as the massive buildup in capacity is undermined by China’s slowing economy, which has led to lower run rates and new projects being delayed.

The LPG trade from the US to China has grown rapidly in recent years to about US$1 billion (S$1.3 billion) a month. Around 60 per cent of the country’s imports in 2024 came from America – almost four times as much as No. 2 supplier Abu Dhabi. Moreover, cargoes from the Middle East often mix propane with butane, which is a less suitable feedstock for Chinese plants, according to traders. 

PDH plants have mushroomed along China’s eastern seaboard, lifting capacity to nearly 22 million tonnes at the end of 2024, about triple that of four years ago, according to Rystad Energy.

At an import tariff of 125 per cent, plants would have lost US$770 on every tonne of American propane they processed last week, according to the research firm. But they would have turned a small profit by switching to Middle Eastern cargoes, assuming a more modest US$30-a-tonne fee for the swap, said Rystad analyst Manish Sejwal.

US exporters, meanwhile, are beginning to secure new buyers in Europe, according to Citigroup. India could be another possibility if prices fall further, Rystad said. BLOOMBERG