FocusWeak demand forces Asian cracker cutbacks

28 August 2008 06:20  [Source: ICIS news]

By Peh Soo Hwee

SINGAPORE (ICIS news)--Asian naphtha-based crackers face more production cuts as operators are currently suffering from the twin blows of high raw material costs and weak downstream demand, traders and producers said on Friday.

"As long as the situation stays the same – high naphtha and low ethylene prices – we can expect more cuts," said a regional olefins trader.

Japan’s largest cracker operator Mitsubishi Chemical said that it planned to cut the operating rates at its three crackers to 80-85% from September-December due to weak downstream demand. The move also triggered other producers in the region to mull similar cuts.

"We are seriously considering cutting production because the ethylene price is coming down much faster than the feedstock price," said a source from Lotte Daesan, which runs South Korea’s largest cracker. The facility at Daesan, which is currently running at 100%, has a nameplate ethylene capacity of 1m tonnes/year.

Yeochun Naphtha Cracking Center (YNCC) also announced last week that it had reduced the operating rates at its three crackers to 95% due to poor economics and planned to maintain the lower production levels into early October if margins did not improve.

The production cuts in Asia have come as ethylene spot prices continue to spiral downwards after hitting a 16-year high of above $1,700/tonne CFR (cost and freight) northeast (NE) Asia in early July.

The correction was largely due to deteriorating business conditions in derivative industries ranging from polyethylene (PE) to vinyls and styrene, traders and producers said.

PE prices had slipped to levels in the low $1,700s/tonne CFR China amid very weak import demand and high domestic stock levels, but were still maintaining a comfortable spread to spot ethylene prices although some traders said there was room for further declines.

Poor demand partly due to a global economic slowdown led by the US had hurt exports, leading ethylene end-users in NE Asia to scale back production. Recent declines in upstream crude and ethylene values also exerted downward pressure on product prices, they said.

Traders said it was not clear if the cracker cutbacks would help to shore up ethylene prices, which were hovering at a four-month low of $1,350-1,370/tonne CFR NE Asia during the week.

"Supply especially from the Middle East is still ample while there has been a slowdown in demand," said a Singapore-based olefins trader.

Iran – the largest exporter of ethylene from the Middle East – was expected to deliver around 15 ships in September, unchanged from August volumes, traders said.

As a result, sentiment in the ethylene spot market remained subdued and sellers and buyers were not in the mood to talk business in the current bearish climate.

Some traders said they were monitoring the market situation in China post-Olympics to see if there would be a rebound in demand although some local industry players remained pessimistic about the outlook for ethylene and its derivative markets.

"Right now we can’t really see any improvement in demand, which is still very weak," said a Chinese vinyls producer in Mandarin. "We are still running our plants at 70-80% and we have more than enough ethylene."

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By: Peh Soo Hwee
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