Asian non-integrated PE firms may see higher margins soon

07 February 2005 09:51  [Source: ICIS news]

SINGAPORE (CNI)--A reversal of fortunes for long-suffering Asian non-integrated polyethylene (PE) producers may not be too far down the road based on the demand and supply outlook for this year, analysts told CNI on Monday.

Non-integrated producers such as Petrokimia Nusantara Interindo (Peni) in Indonesia and JG Summit Petrochemical in the Philippines have shut their PE units since late last year because of poor margins. The weak profits compared to ethylene margins also prompted integrated producers to sell more spot ethylene cargoes and reduce their PE output.

On Monday, Asian ethylene for March deliveries was priced around $1105/tonne CFR Taiwan, and high-density polyethylene (hdPE) price around $1040/tonne CFR China. Low-density polyethylene (ldPE) and linear low-density polyethylene (lldPE) were priced about $1160/tonne and $1050/tonne on a CFR China basis.

The current price spread between ethylene and both hdPE and ldPE is about $50/tonne, based on the ethylene sale price for February deliveries of less than $1000/tonne. The break-even price gap is put around $100/tonne. 

Aaron Yap, an analyst with Chemical Market Associates Inc (CMAI), was confident that the profit margin for non-integrated producers would improve later this year if new polymer capacities in the Middle East come onstream as scheduled.

"The higher PE output from the Middle East producers will compete with the Asian production," he said. The Asian producers would then be forced to reduce their PE production because of stronger competition and this, in turn, would cut the consumption of ethylene.

"Prices of ethylene have to come down eventually because of the weaker demand," Yap said.

He added that the new ethylene plants which will be commissioned later this year would also help alleviate the current tight supply.

Secco's cracker will be the first of three cracker projects in China to start up in 2005, followed by BASF-YPC's 600 000 tonne/year cracker at  Nanjing by April and CNOOC-Shell Petrochemicals' 800 000 tonne/year cracker in Daya Bay, Guangzhou, in November.

Yap also said that the ethylene market was well supported by buoyant glycol prices, but the strength in the glycol market might fizzle in the near term.

"The strong glycol demand hit its peak in 2004 and should be on the way down in 2005," Yap said.

The possible turnaround for non-integrated PE firms would also hinge on the naphtha prices, he said. "Even though the olefin producers are enjoying substantial margins, they may feel more inclined to lower ethylene prices if naphtha values fall."

The spot price spread between ethylene and naphtha was pegged around $600/tonne, with the break-even margin around $250-300/tonne.

However, some ethylene producers expect ethylene prices to remain firm at least over the next few months because of the cracker turnaround season in the second quarter.

For PE, some producers are hoping for a demand jump after the Chinese New Year holidays in late February.

So far, JG Summit and Peni have no definite plans to restart their PE plants.

By: Edgar Ang
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