FocusChina PO production capped before Olympics

15 April 2008 05:54  [Source: ICIS news]

By Wan Hsin Hun

SINGAPORE (ICIS news)--Chinese propylene oxide (PO) makers are likely to keep operating rates low in the second and third quarters while grappling with feedstock costs and pollution control ahead of the Olympic games in August, producers and end-users said on Tuesday.

Already facing swelling inventories, producers are also confronted by squeezed margins due to high raw material propylene and chlorine values, and expenses incurred by the required careful disposal of industrial pollutants, they added.

“The technology employed by most local producers generates 20 to 30 tonnes of waste water for every tonne of PO,” a major producer in China said.

“This causes serious pollution that is costly to manage. It becomes uneconomical to run the plants at high rates when profits are slim and emphasis is placed by the government on the proper disposal of waste water,” he said.

Beijing started clamping down on heavy polluters from the second half of 2007 in preparation for the games and on Monday, announced a series of measures to combat pollution in and around Beijing.

The measures included halting construction work beginning 20 July and forcing coal-burning power plants to cut emissions by 30% throughout most of the summer, the sources said.

Chemical manufacturers located near the city will either be closed or have their production rates lowered, they added.

“Plants in Beijing, Tianjin and Hebei are likely to be closed in July and August, while those in Shandong are likely to run at reduced rates. In fact, some ethylene oxide (EO) units have closed since 1 April,” an end-user in China said.

PO production rates were also limited by the inconsistent supply of propylene and chlorine in China in recent weeks, producers and end-users said. PO plants were heard in the past week to be operating at 60-80%.

“Nonetheless, the main problem for PO makers now is still propylene values, which are already more than yuan (CNY) 12,000/tonne in northern China,” the end-user added.

PO prices on a delivered basis were at CNY13,700-14,000/tonne ($1,957-2,000/tonne) last Friday, up CNY100/tonne from the preceding week as producers raised offers on higher propylene, according to global chemical market intelligence service ICIS pricing.

PO prices began firming on high propylene costs in early March.

Stiff buyer resistance had prevented prices from climbing higher, sellers said, adding that weaker than expected business in the key downstream polyols industry was keeping PO sales slow.

Demand in the polyols market had not picked up as anticipated for the traditionally strong foam application production months of April and May, another end-user in China said.

“Tight credit conditions in the country along with a less competitive export market are contributing to a polyols market slowdown. Polyol manufacturers are buying PO on a need-to basis as they lack cashflow and face difficulty in getting bank loans,” he added.

China had taken steps in the past year to limit its growing trade surplus and cool its economy, including cutting the export tax rebate on a large number of exported goods and allowing the Chinese currency to appreciate against the dollar.

Adding to mounting operating costs for makers which used polyols in end-products was China’s new labour law on top of rising inflation, energy and raw material costs, end-users said.

The new labour law, which took effect on 1 January, required employers to provide long-term employment contracts and compensation for layoffs, among other staff benefits.

Meanwhile, a dearth of imports was lending support to PO prices. A recent shutdown of the Ellba Eastern plant in Singapore and an upcoming turnaround of a unit operated by Sumitomo in Japan were keeping exports to China limited.

LyondellBasell was currently the only regional producer selling into China, although scheduled exports by other producers from late April could add supply in China and exert downward pressure on prices, a third end-user in China said.

With the dim outlook for the PO market over the next several months amid high feedstock and pollution costs, domestic producer Shandong Jinling which had taken its plant offline on pollution woes had decided to idle its plant until the second half of 2008.

“I don’t see a surge in demand for PO in the next few months and in fact prices could soften slightly if propylene supply increased,” another producer in China said, adding that prices were likely to remain high and stable in the meantime.

PO is a key raw material for polyols and propylene glycol.

Major producers in China include CNOOC and Shell Petrochemicals, Shandong Binhua, Tianjin Dagu and Jinhua Chlor-Alkali.

For more on PO, visit ICIS chemical intelligence.

($1 = CNY7.00)

By: Hsin Hun Wan
+65 6780 4359

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