FocusChina PO may rise more despite sharp gains

17 June 2008 05:50  [Source: ICIS news]

By Wan Hsin Hun

SINGAPORE (ICIS news)--Chinese propylene oxide (PO),which has seen a massive yuan (CNY)3,700-3,800/tonne ($536-551/tonne) rise, is set for further gains over the next two weeks on severe shortage and cost pressures from feedstock propylene, sellers and buyers said on Tuesday.

"The recent upward pressure on prices has been tremendous. I expect prices to rise further, although not as sharply as in the first-half of June," a producer said.

Prices had leapt 27% to a historic high of CNY17,600-18,000/tonne DEL (delivered) last week, according to global chemical market intelligence service ICIS pricing.

"It’s hard to pin down what’s a reasonable market price now as there’s a fresh offer every day. Sellers with limited cargoes are trying to pre-empt further increases in propylene, so PO prices are varying widely," a distributor said.

Offers were heard as high as CNY19,000/tonne DEL in the past two days as sellers took advantage of the uptrend to raise prices.

"We won’t sell if prices are too low. Our price targets must be achieved because of propylene costs," another producer said, adding that robust upward pressure remained.

Local plants were operating at reduced rates due to poor economics, sellers and buyers said, adding that average production rates of major producers such as Tianjin Dagu and Jinhua Chlor-Alkali were 50-60% of capacity because of precipitous propylene costs.

The two producers have a 270,000 tonne/year combined capacity.

"The government is offering cash incentives to refiners to make more refined oil to alleviate the domestic supply panic. This has resulted in less naphtha output and therefore propylene," an end-user said.

The lack of refined oil, including diesel, was also hampering inland freight and putting a lid on PO business activity, the sources said, although it was not weighing down demand.

A planned shutdown of a 110,000 tonne/year plant operated by China’s biggest merchant seller, Shandong Binhua, was expected to tighten the already snug market. The unit will be shut for 10 days from 20 June.

The dearth of imports due to Sumitomo Chemical’s plant maintenance in Japan since mid-May was also keeping supply short. The 200,000 tonne/year plant would restart by early July.

Mandated pollution controls in China were partly restricting operating rates as well, with PO production capped until after the Olympic Games in August.

"The energy crunch in China is also keeping production rates low. There’s a bad coal shortage and this is limiting power generation," a third producer said, adding that energy-intensive processes such as PO production were being affected.

"Coal has become very expensive. Prices were only CNY300-500/tonne back in 2005-2006. Now, it’s CNY800-1000/tonne," he added.

In the key downstream polyols market, prices have risen in tandem with PO as sellers attempted to pass on costs. Bulk flexible slabstock was discussed at CNY16,200-17,500/tonne DEL last Wednesday, up CNY750-1,500/tonne from the previous week.

"Polyol buyers have grudgingly accepted the price hikes so far, although we’re unsure how much further they can go," another end-user said.

Nonetheless, PO prices could peak by July with the anticipated easing of tight regional propylene supply and increase in PO imports into China, he added.

Tight credit lines in China, weaker export conditions and high labour costs could also limit the PO price spike as cash-poor end-users purchased on a need-to basis, a third end-user said.

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

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

($1 = CNY6.90)

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By: Hsin Hun Wan
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