Indexation of LPG with other fuels
We recommend that the sector explores the extent to which price indexing and the wider use of long-term LPG contracts can be used to help mitigate the risk of wide LPG price fluctuations, and its associated unpredictability. This would give existing and new customers greater confidence in future fuel prices of the fuel and therefore in the future commercial viability of their operations.
Generally speaking, the use of longer term contracts is more common in LNG markets than in LPG. LPG is therefore more greatly exposed to, for example, seasonal changes and short-term shifts in the supply-demand balance. Competing LNG and diesel prices tend to be more stable and thus customers of those fuels face lower energy price risk overall. In addition, while diesel prices are generally higher than those of LPG currently, the volatility can often mask this feature in the eyes of end users.
We therefore believe that the industry should work together to explore to what extent prices can be better indexed against other fuels. No doubt this is a long-term challenge that may be fraught with complexities, but if some progress can be made, LPG users would likely face lower risks.
Priority: Medium / high