Challenges, opportunities test retailers’ business models

January 8, 2018 By and     0 Comments

Last year, ICF characterized the domestic propane market as one that would experience increased interconnectedness with global propane markets due to the dramatic rise in export capacity and increased supply competition that propane retailers would face from those exports. ICF stated that retailers would need to plan for tighter supply during the winter of 2017-18, different from prior winters characterized by ample supply and warmer weather.

In 2018, ICF expects the retail propane industry to be characterized by transformation and change. However, instead of supply-driven changes, ICF expects that the retail market will enter into a period of demand-driven market transitions. These transitions will be influenced by challenges to traditional markets and new opportunities for growth that will test retailers’ existing business models and perceptions of future domestic market potential.

U.S. propane exports averaged 900,000 barrels per day in the first half of 2017. Click to enlarge.

The supply revolution nears completion

Despite the interruption of propane supply from Hurricane Harvey, U.S. supply has continued to increase throughout 2017 and will set a new record. This growth is expected to continue for the foreseeable future and will result in increased propane exports out of the U.S. Gulf and East Coasts, rather than serving domestic markets.

Propane exports have averaged over 850,000 barrels per day so far this year, an increase of 11 percent over 2016 levels, and far surpassing the domestic retail market of 8 to 8.5 billion gallons. These export levels equate to over 13 billion gallons of propane exported per year, which, following the expansion of the Marcus Hook export terminal in Pennsylvania, is less than 60 percent of the 23 billion gallons of export capacity.

The expansion of the Marcus Hook terminal will mark the last of the major propane export terminals to come online and will end one of the most dramatic events to influence U.S. and global propane markets over the last several decades. As a result of the increase in propane exports, ICF expects that there will be higher domestic pricing volatility and risks of supply disruptions during winter periods from unexpected increases in demand.

In the current market, U.S. propane prices will be driven by global market factors, such as crude oil prices; winter weather in Europe; Chinese and Indian market growth; and large gas carrier ship transport rates. ICF expects that as global markets are saturated with U.S. propane exports, there will be wider pricing differentials between domestic and global prices as U.S. exports are forced to price-in increased transportation costs to reach new markets.

Adapting to a new demand paradigm for domestic markets

In the coming years, ICF expects that the retail propane industry will increasingly be driven by changes to domestic markets as retailers become accustomed to the new supply and export dynamics. The largest challenges the retail propane industry will face will be from the shift in the competitive forces influencing traditional markets, such as residential and commercial heating load, while new markets develop following improvements to engine technology and new propane product offerings.

In this new market, in order to not only defend traditional markets, but also to capture the growth potential in new markets that will underpin the industry’s long-term future growth, retailers will need to be responsive to these market forces and changing perceptions.

In the residential markets, increased appliance efficiency, declining per-customer usage and competition from other fuels are known factors eroding long-term demand levels. While the risks of federal climate regulations have lessened, there are new risks facing residential and commercial markets from local regulatory efforts – in particular in the Pacific and Northeast regions – to reduce greenhouse gas emission levels and, in extreme proposals, to phase out all fossil fuel use. These local environmental efforts are expected to increase and will present new risks to retailers, particularly to those with operations centralized in these markets.

Despite these threats, there are still residential market growth opportunities from fuel oil conversions in the Northeast and in capturing a higher market share in the custom homebuilding sector as the U.S. housing market continues to recover.

ICF has long predicted that engine markets will be the primary source of domestic demand growth, and in recent years we have seen that growth materializing. Continued gains in propane engine performance and growing markets for lawn mowers, irrigation engines, school buses and aftermarket engine conversions all present new opportunities. Capturing just a small share of these markets can present transformative impacts to the industry, while more niche opportunities in agricultural and industrial markets are also attractive growth options for new product offerings.

Propane retailers should be prepared to adapt to new demand market dynamics; continued changes to domestic supply dynamics; and more volatile prices in the future, even if, on average, the growth in propane supply keeps prices low and market conditions provide opportunities for growth.


Michael Sloan is managing director of ICF’s Natural Gas and Liquids Advisory Services and Eric Kuhle is a manager with ICF. They can be reached at michael.sloan@icf.com and eric.kuhle@icf.com.

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