FocusAsian crackers struggle with oversupply

31 October 2008 06:12  [Source: ICIS news]

By Steve Tan

 

SINGAPORE (ICIS news)--Asian cracker operators are reeling from the shockwaves of oversupply and plunging spot prices as petrochemical trade slows to a complete standstill in the region, market sources said on Friday.

 

In the space of three months from August to October, spot ethylene and propylene prices have lost over 70% of their value, neutralising gains that were made in 2004 to 2007 – the three most profitable years in cracker operating history.

 

The acute oversupply situation seen for ethylene and propylene – the basic building blocks for the petrochemical industry – was attributed to the widespread cutbacks in downstream operating rates as the entire manufacturing base slows down in Asia.

 

A chain reaction seen from the recent slowdown in export orders from China, said to be down as much as 30%, had resulted in serious cash flow problems suffered by factories and the trading community, leading to credit defaults and cancellations of imports.

 

Adding to the bearish sentiment were fears of a global economic recession following the credit crunch in the US and Europe.

 

Traders said there could be some surplus ethylene urgently looking for buyers as news broke out that a styrene maker in eastern China was facing financial woes and could potentially go under, while another producer in the same area had shut down all its two production lines with a combined capacity of 400,000 tonnes/year due to poor economics.

 

“We heard on the propylene side, some of them are having serious cash issues, but nothing on the "B" word yet,” said a Singapore-based trader.

 

Crackers reliant on exports such as South Korea producer Yeochun Naphtha Cracking Center (YNCC) have cut operating rates at its three crackers to 70% in order to cope with the shortfall in demand. Japanese crackers, which are more focused on domestic demand, meanwhile, were running at around 80% and above capacity. 

 

“It looks like several naphtha cracker in Asia and Europe will have to shut down if the current bad market continues,” said a Japanese trader.

 

It remained to be seen if such production rates were sustainable as olefin spot prices had clearly gone below naphtha costs, cracker operators in South Korea said. Other traders echoed this sentiment, and added that prices could be close to bottom levels once the stray cargoes were all absorbed.

 

Both spot ethylene and propylene, currently estimated at around $400/tonne CFR (cost and freight) northeast (NE) Asia and below, were said to be in negative margins compared with forward naphtha prices for December, which were posted at $350/tonne CFR Japan – not including the massive $50-60/tonne discounts seen now due to the oversupply of naphtha.

 

The spread between naphtha and spot olefins was pegged between $250-350/tonne during the “good” years, market sources said.

 

No major cracker operators in Asia have announced plans to shut down their facilities as they try to honour their contractual commitments to their naphtha suppliers. Taiwan’s Formosa Petrochemical Corp, however, delayed the start-up of its largest cracker – the 1.2 m tonne/year no 3 unit – in response to the weak market conditions.  

 

Other factors such as the widening gap between contractual prices and spot prices also threatened to spill more olefins into the spot market. For instance, the Taiwanese contract price for October delivery ethylene was heard to be above $1,000/tonne while spot prices for November delivery was just half of that.  

 

The open arbitrage window to Europe had yet to provide any relief to the oversupply situation in Asia, with prices in Europe listed at significantly higher levels at above $800/tonne CIF for propylene. The question of an arbitrage was said to be “pointless” because no one wanted to buy, sources said with regards to propylene.

 

Although market players were unable or unwilling to pin point the bottom for the olefins market, most were in agreement there was not much room to fall given the severe correction in prices. However, the road to recovery could be a long one as the downstream manufacturing base had taken an unprecedented hit.

 

Peh Soo Hwee contributed to this article.

 

For more on ethylene and propylene, visit ICIS chemical intelligence

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By: Steve Tan
+65 6780 4359

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