C3 shortage no surprise

21 June 1999 00:00  [Source: ACN]

Most market players did not anticipate the propylene supply crisis as markets have become more complex and hard to predict

The propylene shortage that has hit Asia in recent months and upped prices should have taken no one by surprise. But it is always easier to be wiser with the benefit of hindsight. Given the complexity of the propylene market in the last few months, it is perhaps not so surprising that many industry players failed to read the signs and stock up to survive the crisis better.

A key factor behind the tightness in the propylene market is the spurt in Indian demand driven by the startup of Reliance Industries' 600 000 tonne/year PP plant in Jamnagar. The first two lines, each with 200 000 tonne/year capacity, started up in February. The last 200 000 tonne/year line will begin operating in October, a company source said.

As a result, Reliance has for the last five months been importing an average 20 000 tonne/month of propylene from Ras Lanuf in Libya and also from the US. The company source told ACN Reliance would stop making purchases after July, as the company expects to start the fluid catalytic cracker (FCC) unit at its new Jamnagar refinery next month.

But the propylene market will continue to be tight for another couple of months, a consultant said, since the plant could not be expected to operate at full capacity soon after startup.

No one can predict with certainty precisely when the situation will ease.

Prices too could be expected to remain at levels above US$400/tonne, the consultant said. This could firm up PP prices, he added.

Another significant cause of the escalation in Asian demand for propylene is the large number of shutdowns in Q2 1999 - also something that could have been anticipated, barring a few delays.

Between April and June 1999, six cracker operators in South Korea had announced maintenance shutdowns. The extended outage of SK's FCC unit has exacerbated the tightness (see p48). The shutting of the Chandra Asri cracker for several months this year also threw the propylene market out of gear in Indonesia. Japan will see cracker shutdowns in Q3 by Tonen, Idemitsu and Showa Denko with a combined capacity of more than 1m tonne/year. This could further disrupt propylene supplies. Formosa Petrochemical has still not restarted its 450 000 tonne/year cracker in Taiwan (see p48).

The only relief comes from Libya's Ras Lanuf, a key supplier. It had rescheduled its long-delayed annual shutdown for end-June, but looks likely to postpone it further, to take advantage of the shortage.

Most of Asia is reeling under the tightness in the propylene market, but it has reached crisis proportions in the Philippines and Indonesia. PP producers like Petrocorp are being forced to cut operating rates to as low as 60%, with inventories for June reaching rock bottom, and threatening to erode profit margins for the fiscal year 1999, said a company official.

In Indonesia, the maintenance shutdown by cracker operator Chandra Asri extended from March to May 1999. This had downstream offtakers Tripolyta and Polytama looking to import. The PP producers expect demand to rise when political stability returns and leads to a buoyancy in consumer demand.

The shortage led propylene prices to increase sharply, going up by as much as US$80/tonne in a matter of weeks. From a low of US$280/tonne cfr in February, last week the product was being sold at US$420/ tonne.

Making the most of the scarcity are the Libyan and Japanese suppliers, say market sources. Libyan cargoes which were originally targeted for Southeast Asian markets are now being diverted to Europe, and to India, where buyers can pay the going rate.

The soaring prices have also led Japanese suppliers to increase export volumes. In the first five months of this year alone, Japan has exported 260 000 tonne of propylene, one source said, compared to 314 000 tonne in the whole of 1998.

The current propylene shortage has created some strange market configurations. Japan has traditionally faced a higher demand for ethylene than propylene.

But with propylene prices finally overtaking ethylene, it would appear to be in its interest to up its production volumes of propylene. In 1998, production volume of propylene was 5.1m tonne, with 4.2m tonne coming from crackers.

With better economic news emanating from the rest of Asia, and a projected escalation in consumer demand, Japanese trading companies are putting pressure on cracker operators to increase their propylene production, say market sources.

What makes it an unpredictable playing field for market operators is the fact that the propylene market, unlike that of ethylene, is largely dependent on spot buys and short-term contracts stretching a maximum of two months. This makes it very difficult for buyers to cushion against shortages, as an Indonesian player said. 'If demand suddenly picks up, we have to scramble for supplies, and pay the price being asked. We have no bargaining power.'

His sentiments are echoed by a Philippine buyer. 'I thought I was covered until June. But suddenly the market picked up and I would like to increase operating rates by 20-30%. But there is no one willing to sell at yesterday's price. So I have to budget for much more.'

US deep-sea cargoes, which would have traditionally plugged short-term shortage, are now viewed as too high-priced. Some Southeast Asian producers like Petrocorp are turning to Japanese contract suppliers for the short term.

The tightness in the market has forced many Asian PP players to cut their export targets by close to 50%. It has also played havoc with their plans to up operating rates and benefit from the expected buoyancy in the economies.

'Ultimately, it is only the really strong downstream producers who have the staying power to weather the fluctuating market conditions. There is a danger that the smaller ones will get wiped out,' said a market source. While most Asian buyers hope the problem will be shortlived, and will ease in a matter of months, one Japanese exporter contended the crunch could last well beyond 2000. 'By the end of the year, the price will climb to US$500/tonne,' he predicted.

However, most other industry players believe this is an alarmist forecast. 'Prices of propylene have to keep some kind of parity with those of derivatives. And PP prices have shown signs of plateauing at US$500/ tonne over the last week, from US$530- 540/tonne the week before (ACN 14 June, p30) and could go down even further,' a consultant said.

According to a Philippine buyer, the Indian market which is driven chiefly by domestic demand, has helped push up global prices, making it unviable for Southeast Asian PP producers like him to obtain adequate supplies.

'Many of the Southeast Asian PP producers like Petrocorp, JG Summit in the Philippines, or Tripolyta and Polytama in Indonesia are also catering to the export market. So they need to get their feedstock at lower prices to keep their margins viable. But this is becoming increasingly difficult with big players like Europe and India entering the fray,' the consultant said.

However, there are no 'good guys or bad guys in this market,' as another consultant put it. 'You cannot expect a seller to be concerned about the buyer's capacity to pay. Very often, an Indonesian or a Philippine buyer is much more tardy about producing letters of credit than a buyer like Reliance. So it is hardly surprising that the seller would prefer to clinch the easier deal.' The upside to this situation is the strengthening of prices down the C3 chain. 'A tightness in supply will benefit all, both the seller and buyer. The buyer can push up the prices of the derivatives. And this will help the industry as a whole,' said a Japanese trader.

But not everyone believes that this rationale will hold. PP prices fell last week to US$520/tonne cif in India, and to US$500/ tonne cif in Hong Kong.

One producer said the fall had been anticipated in the market, but it had not been expected so soon. It makes current propylene price ideas of US$400-420/tonne cfr look highly unlikely to be sustained, he said.

The question is whether the scenario of shortage is too shortlived to benefit anyone at all. As a market source pointed out: 'Gone are the days when propylene would sell for US$700/tonne. Even if prices claw back to more respectable levels, right now the name of the game is survival.'

Even if the problem is resolved in the short term, market players are worried it could surface again a couple of years from now, when new PP capacities come onstream in Asia.

If the same scenario as that experienced by Reliance this year is repeated - with PP starting ahead of propylene becoming available - a similar crunch in regional propylene supply could develop.

For instance, if Haldia Petrochemicals' 190 000 tonne/year PP plant were to start ahead of the startup of the 420 000 tonne/ year cracker, which has already been delayed to Q3 1999 from July, it could see demand for propylene outstripping supply. Propylene demand could also see a short-term spurt when National Organic Chemical Industries Ltd's PP joint venture with Montell becomes fully operational, ahead of the 300 000 tonne/year expansion of the cracker being accomplished.

Once again, history could repeat itself.

ACN News Analysis appears every week. Edited by Prema Viswanathan, it gives the context behind breaking stories on Asia's chemical sector

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