LPG gas is used as a fuel for many residential, agricultural, and commercial heat applications which includes cooking, heating, and hot water systems. However, the use of LPG gas has numerous other applications including its use as a refrigerant, propellant, vehicle fuel, and petrochemical feedstock. The consumption of LPG gas has been on the rise as it is an economical source of fuel and burns efficiently with very low combustion emissions. Although, burning LPG releases carbon dioxide, a greenhouse gas, the emission is very low per unit of energy produced compared to coal or oil. Currently, the US is the leading producer and exporter of LPG. The most common variety of LPG is bought and sold in the form of propane and butane gas. The global market for propane gas and butane gas is expected to grow at a rate of 3.1% and 2.8%, respectively, during the forecast period. (SpendEdge – Procurement Market Intelligence Report)
Challenges in the procurement of propane and butane gas
Butane gas market
- Evaluating supplier’s compliance with labor laws and international standards regarding workplace conditions is extremely important as non-compliance may incur penalties and fines for the buyers. Conducting periodic audits of suppliers’ facilities adds to procurement costs and complexity as well acting as a significant procurement pain point.
- Buyers need access to data associated with suppliers including plant utilization rates and total yield capacity of plants. Since the information is critical pertaining to suppliers’ operation, buyers may not always get such data. As a result, suppliers are not forthcoming with such information making it difficult for the buyers to assess suppliers.
- In order to promote consumption of domestically produced products, several countries have levied import duties on products including butane. However, domestic prices for butane can be higher due to demand-supply imbalances and inefficiency across the value chain. Varying prices and high import duties add to the complexity of procuring the butane LPG gas.
- Prices of butane are consistently changing due to factors such as variations in demand and supply and volatility in crude oil prices. As a result, there are different pricing for the butane LPG gas between the winter and summer seasons. Due to such price fluctuations, buyers have a hard time determining the procurement budget compelling them to hire consultants to forecast future prices, which adds to their procurement costs.
- Propane gas prices are highly dependent on the cost of crude oil, gasoline products, and diesel. The high volatility of crude oil prices leads to fluctuation in the cost of propane, thereby making it difficult for buyers to forecast propane gas prices to estimate their procurement budgets accurately.
- The propane gas produced is generally stored in large steel containers or tanks or through underground pipelines in compressed liquid form at the buyers’ operational facilities. Storing propane in liquid form significantly increases the storage costs for the buyers in addition to the maintenance costs. As a result, buyers are facing complications in the procurement of this LPG gas in terms of added costs and efforts for storage.
- In a bid to minimize their maintenance costs, buyers usually rent or lease the storage containers from suppliers. Consequently, signing a lease agreement makes it difficult for the buyers to switch from one supplier to the other due to the high switching costs. The switching costs include uninstallation and reinstallation of the equipment and also increases the downtime leading to operational interruptions.
- The suppliers of propane gas usually engage with third-party vendors for the transportation and storage of propane. However, buyers are not aware of information regarding the contractual agreements between the supplier and third-party vendor in terms of the type of storage containers used and regarding compliance with transportation laws and regulations. Lacking such information makes it difficult for the buyers to abide by compliance laws and may impact their supply flow of LPG gas and quality of the product.