Panama Canal Delays Suggest Little Change To Long-Term Trend
BMI View: Delays to the construction of the Panama Canal present some downside risk to our short-term US LPG net export forecasts. However, with our Shipping Team having noted that the most likely scenario is for a resumption of negotiations, we continue to anticipate a steady expansion in the US' LPG net exports over the long term.
While the delays to the Panama Canal expansion may weigh briefly on US liquefied petroleum gas exports, with our Shipping team highlighting that the most likely scenario is for negotiations to resume in the coming weeks, the impact is likely to be relatively short lived. Indeed, while we see modest downside risk to our forecasts for US LPG net exports this year and next, the longer term trend for rising exports is unlikely to be dramatically impacted.
LPG Production Pushing Higher
We maintain our view that US production of LPG (including ethane, propane, and butane) is set to push higher over the coming years. We have already seen output jump noticeably on the back of the shale boom such that net exports have risen from a modest 67,000 b/d in 2008 to an estimated 609,000b/d in 2012. Moreover, while substantial increases in domestic consumption will likely begin to eat into total net export volumes modestly over the medium term, we expect the country will remain a large exporter of the LPG, with net exports of around 371,000b/d in 2018.
Meanwhile, rising Asian demand will comfortably absorb the substantial US output, with propane set to be used increasingly as a feedstock alternative to natural gas for petrochemical plants. Indeed, the new supply and demand dynamics of LPG are reflected in the surging number of LPG vessel orders over 2013. Although vessel orders move in cycles, LPG is currently on an upswing, largely on the back of shippers looking to capitalise from rising demand and new supplies from the US shipped off to global markets.
|Cyclical Highs For LPG Vessel Orders|
|Number of Vessels On Order, Liquid Bulk, By Type|
We continue to believe that the Panama Canal expansion is set to play an important role in this story, enabling greater volumes to be shipped to Asia. Specifically, when completed, the newly expanded Canal will allow for the passage of very large gas carriers (VLGCs). This will cut down on vessel transport time to just 25 days from the US East Coast to Asia and reduce shipping costs by 30%-50% according to Platts. Furthermore, this will likely put downward pressure on competitors' prices, and benefit Asian demand, in turn further boosting demand for US LPG. Namely, there is already a gap between US and competing Middle Eastern LPG prices, and with transport costs falling for the US producers, this would likely widen the spread between the two. As the US continues to ramp up production of LPG, this could even eventually put downward pressure on Middle Eastern producers and support Asian consumption.
Delayed, But Not Off the Table
Given the above, we believe that the delays on the Panama Canal expansion project certainly suggest some downside risk to our robust US net export forecasts in the short term. Specifically, while initially due to come online in early 2015, work on the Canal has ground to a halt following the breakdown in negotiations between the Panama Canal Authority (ACP) and the Grupo Unidos por El Canal (GUPC) consortium, with the latter seeking compensation of US$1.6bn due to cost overruns. If this delays the Canal coming online as we anticipate, a lack of sufficient transport capacity could slow net exports.
|Scenarios||Outcome||Impact On Deadline|
|1||Negotiations Resume||Likely||Deadline Likely To Be Pushed Into H215|
|2||GUPC Backs Down And Resumes Work||Unlikely||Deadline Likely To Be Pushed Into H215|
|3||ACP Backs Down And Pays GUPC For Cost Overruns||Unlikely||Deadline Likely To Be Pushed Into H215|
|4||GUPC Is Dropped And A New Contractor Is Picked||Unlikely||Deadline Likely To Be Pushed Into H215-2016|
|5||The Plan To Expand The Panama Canal Is Scrapped||Very Unlikely||Project Is Cancelled|
|Source: BMI Research|
Ultimately though, given our Shipping team's view that the project is highly unlikely to be cancelled, but instead that the start date will merely be pushed back ( see scenarios table above), this does little to change our long-term view of the trend. Indeed, we believe the most likely scenario is that we will see a resumption of negotiations, with some sort of compensation package for the GUPC. As such, for now we maintain a bullish long-term outlook on US LPG exports.