Over 10% increase in LPG prices - Why LPG depot prices turned the other way
Just to explain how LPG prices move and the reason for the recent LPG price movements in Nigeria
Nigeria LPG prices are dependent on various factors and they are as follows:
Mont Belvieu prices:
LPG prices can be benchmarked by Mont Belvieu prices which is an international price index for LPG. Mont Belvieu is a strategic location along the US Gulf Coast, with proximity to major refining complexes, underground storage capacity, and access to onshore and offshore transportation for shipping liquids to international markets. The Mont belvieu pricing index is in use because its applicable for pricing as the distance from the location of Mont belvieu(Texas) to West Africa is about the same distance from West Africa to Europe. So, Mont Belvieu price in cents/gallon or USD/Metric Tons is the cost of LPG without the cost of Marine Freight, Port Charges, Duty, and Throughput fees and is a major factor in the determination of price for Nigeria. When it's up, prices are up, and when it's down prices are down. The chart above shows Mont belvieu price movement; with the lowest in June (270/MT); it has risen by more than 30% since then which has led to the increase in depot prices. see link here
Naira - US Dollar Exchange rates:
As of May 29th, 2023, the BDC rate for the USD was about 760 Naira. Since importers mainly have no prompt access to USD from the CBN, they have to plan with the BDC rate. Now with lower Mont Belvieu prices and a 'stable' FX rate for USD, prices at the depot began to fall and it was felt even at the retail end - it was a beautiful story for everyone - prices can indeed come down in Nigeria. Prices at the depot touched 9 Million Naira per 20MT at some Depot. However, international prices have moved up by more than 30% since June and the FX rate has moved from 760 to about 850 Naira/USD, which easily translates to about N700,000 increase per 20MT on just the product alone. Other factors that could increase are Duty fees in USD and Freight cost in USD. Today, we are near 11 Million Naira per 20MT from 9 Million in about a month's interval.
LPG Sourcing ( Local or Import):
It's important to know that LPG depot prices are benchmarked against imported LPG; because there is still a significant supply gap in the market which the more expensive import is filling. Last year the industry consumed just over 1.2 Million tons ( source: NLPGA ), out of which about 50% was sourced from local sources. The cost of LPG in Nigeria is also dependent on where it is sourced from. Currently in Nigeria, we have more LPG sourced via import than locally. The main sources of local LPG supply are NLNG, Bonny ( about 400,000MT per annum), and Kwale Hydrocarbon Ltd, Kwale ( about 120,000 MT per annum ). Others are Greenville LNG, Rumuji, PNG Plant, Umutu, and recently Panocean, Ovade. We could also include LPG from Mobil BRT, Bonny, although volumes from this source have a very good potential for LPG sourcing, there are no committed volumes.
When LPG is sourced locally, payment is made in Naira, and Port charges are cheaper ( for NLNG and Mobil BRT which are offshore); this means cheaper landing cost when compared to imports. For the in-land LPG plants mentioned earlier, they aren't offshore and do not incur Freight cost.
LPG sourced via import is more expensive because it involves every aspect of the supply chain and the corresponding cost. Freight cost, clearing fees, and FX rates are the main component of the cost difference when compared to locally sourced LPG. So when imported LPG is taking care of over 50% of supplies, the LPG prices in Nigeria have to be benchmarked by it.
Forces of Demand and Supply:
Forces of demand and supply could force both international prices and local prices down. During the COVID-19 lockdown, international prices went as low as 89.5 USD./MT; last year march during the escalation of the Russia - Ukraine war, it went as high as 900 USD/MT- just look at that.
So, when prices of LPG get so high, the market could withdraw ( demand destruction ). Also when LPG supply is low, prices could go up; as we are experiencing internationally, due to the cut in crude oil production by Saudi, Russia, and other OPEC countries. It is envisaged that when crude oil production is lower, there would be lower LPG available, hence the rise in prices. Another factor that has led to the increase in international prices is the increase in demand due to the very hot summer, leading to an increase in demand for cooling- normally during summer prices are lower and higher during winter when countries require more energy for heating.
I hope this post has helped to explain how LPG prices move and the reason for the recent LPG price movements in Nigeria.
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I will be sharing a post on why LPG Autogas is the low-hanging fruit for Nigeria and not CNG; look out for it.