Muddled markets

22 March 2004 00:01  [Source: ACN]

Malini Hariharan tries to make sense of what is happening in the olefin and polyolefin markets, where a confusing situation has become worse

FIGURING out what exactly drives olefin and polymer markets is not an easy task even in the best of times. And it has become even more difficult these days. Traditional links between products appear to have broken down with polyolefin and olefin markets moving almost independently of each other.

For instance, polyethylene (PE) prices fell heavily in February and early March. At any other time this would have triggered a crash in ethylene prices. However, C2 not only held firm but also strengthened during that period.

In mid-March, PE producers were valiantly trying to prevent prices from sliding below US$800/tonne cfr China, while C2 sellers were having no problems offloading material at US$780-820/tonne cfr Asia.

The situation was not very different in the C3 chain, with propylene prices at US$675-735/tonne cfr Asia, while polypropylene (PP), which was facing the same pressures as PE, found few takers at US$810-850/tonne cfr China.

Making sense of what is happening is certainly difficult but, fortunately, not impossible. This feature will cover some of the major factors that have been influencing markets in the past few months.

In the olefins market, supply tightness has so far helped sellers overcome the negative influence of weak polymer prices.

On paper, Northeast and Southeast Asia are forecast to be short of ethylene and propylene this year. In the case of ethylene, Mazlan Razak, vice-president olefins and derivatives at DeWitt & Co, estimates that the two regions will fall short by 400 000-450 000 tonne in 2004.

Exports from the Middle East, which totalled 250 000-300 000 tonne in 2003, are forecast to be lower this year as a new PE plant will be commissioned. And with Europe also forecast to be short, product from Libya or the Americas is expected to flow to that region rather than to Asia.

Long-standing fears of a propylene shortage in Asia are also coming true. Mazlan estimates that, on paper, C3 will be short by 450 000 tonne in Northeast and Southeast Asia this year.

Market sources estimate that the total trading volume (transfer by vessels) in Asia last year was 1.1m tonne, of which 190 000-200 000 tonne came from the US, around 100 000 tonne from the Middle East and the balance from other regions. Inter-regional trade was 800 000 tonne with the chief exporters being South Korea (250 000 tonne) and Japan (300 000 tonne). The chief importers in Northeast Asia were Taiwan, South Korea and China. Each of the three countries imported about 200 000 tonne. Taiwan also exported around 50 000 tonne.

In Southeast Asia, the main importers were the Philippines (180 000 tonne), Indonesia (200 000 tonne) and Thailand (30 000 tonne).

While import demand for most of the Asian countries in 2004 is likely to remain unchanged, China will, as always, be thirsty for more. Mazlan estimates that the country would need to import 250 000-300 000 tonne this year, up from 200 000 tonne last year.

Meeting this requirement is likely to be difficult as exports from the Middle East are forecast to be negligible this year, as the 800 000 tonne/year Petrokemya cracker will be running on 50% ethane and 50% propane. The cracker had used mainly propane in 2003 due to a shortfall in ethane supplies. However, a new gas-separation unit was commissioned late last year – which means enough ethane will be available in 2004 for the cracker to return to the original feedstock ratio, explains an olefins trader. And exports from Iran are expected to fall once a new PP plant starts up, which is likely to be in Q2.

The shortfall in both C2 and C3 is likely to be felt more strongly in the second quarter of this year as a number of crackers are scheduled to shut down for maintenance (see table). Add to this any outages, and the impact could be quite serious.

One trader describes Q2 to be a ‘super tight’ period for C2. And a shipping source says some traders are actively discussing US C3 shipments even at the prevailing high prices.

So how high can olefin prices climb in the next quarter?

When a trader was asked this question in mid-February, its answer was that ethylene would hit US$1000/tonne cfr Asia at the upper end of the price range by end-April. But when asked the same question in mid-March, it said its expectation had fallen to US$900/tonne cfr Asia.

It is true that, despite the minuscule difference between current monomer and polymer prices, market activity has been quite brisk in the past few months, with cargoes changing hands regularly.

‘What we are seeing these days is an active fob market with traders buying to cover short positions. Many of these traders have more supply than sourcing contracts in Southeast Asia. This is one of the factors supporting prices,’ says a market source.

Traders are also banking on the more robust markets of other derivatives such as styrene and monoethylene glycol to support higher numbers in Q2. But, despite claims that they are just not bothered about the fall in PE and PP prices, the lousy polymer markets could well upset their calculations.

Some signs of this were evident in early March when propylene dipped by a few dollars (see page 30) as Chinese importers stepped back from the market. Also, a few integrated polymer producers had cut production, as it was more lucrative to sell monomers rather than polymers. If more follow suit in the coming weeks, the tightness in Q2 supplies could turn out to be less severe than imagined.

In the Chinese polyolefin markets, there is a sense of déjà vu. Prices had been rising steadily since October 2003, as Chinese traders grabbed every available tonne in the market. Even the Lunar New Year period in January, traditionally a low demand season, saw no respite in buying. But the good times rolled to an end in mid-February, when traders’ stocks on the mainland reached unmanageable levels. Sensing a change in market direction, end-users held back purchases, further aggravating the situation.

In mid-March, Chinese PE and PP buyers were in no mood to meet producers’ price expectations of US$940-950/tonne cfr China for low-density PE (ldPE), US$840-900/tonne for linear ldPE (lldPE), US$810-840/tonne for high-density PE (hdPE) and US$840-850/tonne for PP. After all, material was available in the local market from traders at prices that were at least US$100/tonne cheaper.

For instance, the local price for hdPE yarn at Rmb7600/tonne would work out to around US$700/tonne delivered, substantially lower than offers from South Korean, Taiwanese or Indian producers.

‘PE producers say that, as C2 is at US$800/tonne cfr Asia, hdPE should be at US$920-930/tonne cfr China. Yes, that is true. But there are no buyers. So offers will have to be lowered. Based on my experience, I think producers are still insisting on higher numbers because they have not yet shipped out the quantities that were booked in early February. Once that has been moved, they will lower offers,’ insists a polymer trader.

The trader reports receiving a firm offer for injection-moulding and raffia-grade hdPE of Indian origin at US$820/tonne cfr China. His counter offer was US$750/tonne cfr China.

A second trader reports March PE offers from India at US$820-850/tonne cfr China/Hong Kong with bids at US$720-730/tonne cfr China/Hong Kong. He claims that one Indian producer’s attempt to sell hdPE at US$790/tonne fob India failed to attract even a single interested party.

Other factors contributing to the recent chaos in the polyolefin markets include power shortages in China and the ongoing dumping investigation by the US on PE retail carrier-bag exports from China.

Traders say that processors in the Shanghai and Guangdong areas have been forced to keep their units shut for a few days each week due to a cut in power supply. And some PE bag exporters from Hong Kong with operations in Guangdong have transferred orders to units in Southeast Asia ahead of a verdict by the US on the dumping case, points out the first trader.

With very little buying taking place, producers’ inventories had risen sharply by early March. A third trader estimates that South Korean, Indian and Thai producers were facing the maximum pressure from rising stocks.

Some South Korean producers were diverting surplus PE and PP cargoes to South America and Africa. But the declining price trend in those markets and rising freight rates forestalled some of those efforts.

The second trader estimates that PE and PP sales in the Indian market in February were 50% below average, as local producers’ did not reduce prices to match those elsewhere in Asia. And he estimates that March sales would be even lower, as buyers ‘are very clear now that prices are on a downtrend’.

How far prices in India or China will fall is anybody’s guess. Many of the producers and traders are still confused about market direction. Traders are debating whether they should dispose of their cargoes or hold on to them until Chinese customers return to the market when their inventories run low.

Sellers are also divided on when markets will bounce back. The pessimists believe they would have to wait until May as more material is on its way to China. The first trader estimates that around 20 000 tonne of Indian PE and PP, booked in early February, will land in China on 20-31 March.

‘I am waiting for hdPE to drop to US$720/tonne cfr China/Hong Kong before I start buying,’ says the first trader. ‘I think lldPE, hdPE and PP will stabilise at around US$750/tonne cfr China,’ predicts the second trader.

The optimists are, of course, more confident that local prices in China are near the bottom. However, they concede that current offers are unrealistic.

The basis for their optimism is the poor buying by China in February. ‘This means that buyers will have to return. This is likely to happen later this month or in April,’ says the third trader.

He further points out that buying activity picked up slightly in mid-March, especially for lldPE. ‘Some end-users are able to accept PE at US$800-810/tonne cfr China for small volumes for March shipments. If this continues, prices can stabilise at this level. But it is true that Chinese traders’ buying ideas are far below this level,’ he concedes.

In the meantime, international traders are attempting re-exports out of China to keep the cash flowing (see page 25). The first trader says that he bought 1000 tonne of PE from a Chinese trader for sale in Southeast Asia. ‘If I have to buy hdPE from a producer in South Korea or Taiwan, their offers would be well above US$800/tonne cfr Asia. Chinese traders are desperate to sell material. With the freight rate from China to Southeast Asia at around US$25-30/tonne, I can still make a profit of at least US$10/tonne.’

Returning to the olefin markets, most players rule out the possibility of a crash in olefin prices, although a few believe that it will ease from the current high levels in the coming weeks.

One cracker operator claims that poor PE markets have already influenced C2. ‘C2 prices would have been higher if the PE market was stronger.’

Despite this, integrated producers have few reasons to complain. Even though naphtha has been fluctuating at over US$300/tonne cfr China during the first quarter, the chain has been making money (see page 14).

And there are few who doubt that the average price of C2 and C3 will be higher in 2004 when compared with 2003.

But do not ask how much higher. As Mazlan puts it: ‘At the end of the day, it is China that will determine the fair price for olefins. The crucial question is: at what prices will China be willing to buy polymers? And that would depend largely on what companies such as Wal-Mart are willing to pay for finished products.’

CRACKER SHUTDOWNS IN Q2 2004

Company	Location	Capacity	Shutdown period
Daqing General	Daqing, China	480	end-May, 30 days
Gail	Auraiya, India	300	April, 30 days
Maruzen Petrochemical	Goi	370	May, 30 days
Mitsubishi Chemical	Kashima	370	May, 30 days
Sanyo Petrochemical	Mizushima	443	March-April, 30 days
Tosoh Corp	Yokkaichi	570	March-April
Titan Petrochemicals	Johor, Malaysia	330	June, 30 days
Yeochun NCC	Yeochun, South Korea	530	April, 14 days
Honam Petrochemical	Yeochun, South Korea	700	April, 40 days
Hyundai Petrochemical	Daesan, South Korea	500	April, 25 days
Source: ACN database

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