Outlook '06: Bullish '06 for olefins in Asia on tight supply

03 January 2006 03:57  [Source: ICIS news]

By Steve Tan

SINGAPORE (ICIS news)--Asian demand for ethylene and propylene is expected to remain bullish in 2006, with prices for the olefins forecast to be around the four-figure territory on the back of tight regional supply, according to traders and sellers.

The signs were evident towards the tail end of 2005 - olefins traders and producers faced an uphill task in keeping buyers satisfied for 2006 as tight vessel space, a heavy upcoming shutdown schedule and increased buying appetite left many buyers scouring for cargoes.

Nineteen naphtha crackers are to be brought offline from March-October during the traditional turnaround season, compared with 16 scheduled shutdowns in 2005. In Japan, Asia’s largest olefins producer, up to eight out of 15 crackers will be down for an average of a month. This will result in approximately 4.5m tonne of ethylene going offline for an average 30-day period, compared to about 2.9m tonne in 2005.

Any unexpected cracker outage would be sharply felt throughout the region due to the snug balance, added the sources. 

“It’s definitely going to be tight, with over 1m tonne of ethylene demand expected to come into the market,” said Yuha Kodaira, a senior official with Japanese trading house Marubeni Corp, citing new downstream capacities coming on stream in China, Japan and Taiwan.

In Japan, this includes Tosoh Corp’s 400,000 tonne/year vinyl chloride monomer (VCM) unit, Nippon Petrochemicals 150,000 tonne/year metathesis unit, and newly expanded capacities for vinyl acetate monomer (VAM) and acetic acid from Showa Denko. Three new VCM plants in China and the start-up of the world’s largest VAM line (350,000 tonne/year) in Taiwan, Asia’s largest importer of spot ethylene, should also drive up demand.

“The key derivatives affecting the demand would be the polyethylene (PE) and VCM,” said another Tokyo-based olefins trader. Ethylene prices could cross the $1,100/tonne high that they reached in 2005 if the derivatives sectors are healthy, he added.

There was, however, a caveat. Surging prices would be capped by increased price competition downstream, especially in the VCM sector. Approximately 80% of Chinese ethylene spot demand will be from VCM producers, who are struggling to make ends meet in the face of competition from lower-cost acetylene-based PVC makers.

There are also new ethylene capacities coming on stream in 2006. The start-up of CNOOC & Shell Petrochemical Co's (CSPC) new 800,000 tonne/year cracker at Daya Bay, Huizhou, Guangdong province, by February would have little impact on the spot balances as most of its molecules would be for captive use. The other world-scale cracker to come on stream in 2006 is Formosa Petrochemical Corp's (FPCC) 1.2m tonne/year No 6 cracker in Taiwan, most probably in December.

Other cracker expansions are mostly in South Korea, where three of the four cracker shutdowns also involve debottlenecking that adds 475,000 tonne/year ethylene to ease the short domestic supply situation. SK Corp’s No 2 unit will add 25,000 tonne/year, Yeochun NCC’s (YNCC) No 1 cracker will add 350,000 tonne/year, and LG Petrochemical 100,000 tonne/year.

In Southeast Asia, Titan Chemicals in Malaysia will add 50,000 tonne/year to its No 1 cracker, Indonesia's Chandra Asri 70,000 tonne/year by the first half of 2007 and in Singapore, ExxonMobil will add 80,000 tonne/year.

As a co-product of naphtha cracking, propylene supplies are also expected to remain tight due to the numerous cracker shutdowns. In addition, at least two propane dehydrogenation units, one in South Korea and the other in Thailand, will be shut for a month-long maintenance.

“Fundamentally ethylene and propylene is going to be tight, but propylene supply will improve towards the second half of the year as new capacities come on stream,” said a Singapore-based olefins trader.

An additional 17-18 Liquefied Petroleum Gas (LPG) vessels, as well as on-purpose propylene production such as metathesis plants, and deep catalytic crackers, will bring much-needed propylene supplies into the spot markets, he added.

Japan will be Asia’s largest propylene exporter, with Nippon Petrochemicals adding 150,000 tonne/year of net export capability to the country's annual exports of around 200,000/tonne/year. The added capacity will mostly come from its new metathesis unit, which will come on stream by February and supply spot material to term buyers in South Korea, Taiwan and China. FPC will also increase its capacity by around 300,000 tonne/year by June due to improved propylene extraction from its fluid catalytic crackers (FCC) units.

A large amount of that will go to China, which will remain Asia’s biggest importer of spot propylene in terms of volume and number of buyers. End-users from the propylene oxide (PO) and acrylates sectors were said to be able to pay top dollar for small-sized lots of around 1,500 tonne. These buyers led the market in 2005, paying a $20-30/tonne premium over other derivatives. Chinese buyers are expected to increase their demand for spot propylene by as much as 50%, from 200,000 to 300,000 tonne/year partly due to the increased availability from Japan, said a Shanghai-based olefins trader.

By: Steve Tan
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