OUTLOOK '09: Asia olefins face uncertain future

24 December 2008 04:54  [Source: ICIS news]

By Steve Tan and Peh Soo Hwee

SINGAPORE (ICIS news)--The Asian olefin markets are set for a bumpy ride in 2009 as projections of muted spot pricing and oversupplied downstream markets are expected to weigh on sentiment, observers in the olefins markets said on Wednesday.

In terms of pricing, 2009 contractual term supply negotiations could be a harbinger of things to come with the majority of participants expecting relatively weaker price formulas talked between flat to discount, compared to double-digit premiums that were seen in 2008.

A buyer in southeast Asia had even reported successfully fixing a small ethylene (C2) cargo at a double-digit discount for next year, while others were heard asking for the same. However, Asian C2 suppliers continued to stand their ground, citing tighter supply due to cracker rate cutbacks that are expected to continue into 2009.

Asia had reduced cracker operating rates to 70-80% during the fourth quarter as derivative demand had taken a hit on the back of the global economic downturn, but several market players did not see a return to full rates in the near term due to uncertain demand conditions.

Similarly, propylene term supply negotiations were discussed at flat to discount over published prices for formula pricing into China and Indonesia, sources said. It remained to be seen if buyers would be successful in bringing down prices from 2008 as the availability of cargoes was limited in comparison to demand.

As for spot pricing, some market players expect ethylene to remain firm in the New Year due to limited spot supplies, but prices could be capped by fragile downstream derivative conditions for products such as styrene monomer, vinyl acetate monomer and polyethylene, market sources said.

In the near term, a reduction in exports from Iran during winter, and Asian cracker cuts had curbed spot supply in the region at a time when buying interest was emerging amid a slight pick-up in selected derivative markets, ranging from the polyethylene to vinyls sectors this month.

“C2 (ethylene) should remain firm in January because demand has improved compared with October and November but nobody knows what will happen after Chinese New Year,” said a Japan-based olefins trader.

Hence a Middle-East producer said it was seeing more inquiries for January spot material from buyers in Asia looking to replenish stocks and was considering selling 1-2 lots of ethylene for second half January arrival.

“Now demand is good because stocks are very low. After the Chinese New Year, we will know if the situation is temporary or is it because of the nature of the market,” he said.

In the first quarter next year, traders said there remained firm buying interest from customers in southeast Asia looking to secure sufficient feedstock amid upcoming turnarounds in the region. For example, impending shutdown of Indonesia’s Chandra Asri’s 600,000 tonne/year cracker in Merak for 45 days was expected to boost spot demand.

However in the longer term, the flood of ethylene and ethylene derivatives from Qatar, Saudi Arabia and Kuwait starting from 2009, was seen weighing heavily on derivatives especially polyethylene (PE), hence indirectly impacting ethylene prices.

“This is just the beginning,” said a polymer maker in Indonesia, anticipating a bloodbath next year when the full impact of new Middle East and Asian polyolefin supplies come on stream. The outcome of propylene and ethylene pricing next year would primarily lie on the demand side, as the market is expected to be oversupplied, he added.

“We are expecting an additional 1.5m tonnes/year polypropylene (PP) from the Middle East next year, plus another 1m tonnes/year from India,” he said, giving an example of the scale of new expansions.

Fresh stand-alone propylene supply is also expected to come from within Asia, with a new fluidised catalytic crackers (FCC) coming on stream from state-run PetroVietnam, and Pertamina’s expansion in Indonesia. At least four new crackers in China, plus another two from Thailand’s PTT and Shell in Singapore, are scheduled for start-up between mid-2009 to early-2010.

Within the trading arena, established olefin traders like the Japanese trading houses are taking a conservative stance and could be reducing the number of vessels out on time charter in anticipation of tough times. On the other hand, Korean trading houses – with closer affiliations to producers – could try to pick up the slack, especially for propylene exports, sources said.

Traders anticipate freight rates to come under pressure next year after hitting fresh highs in 2008, with additional semi-refrigerated ethylene vessels coming on the market next year coupled with shrinking demand for term supplies.

From a feedstock perspective, some olefin traders and buyers predicted crude prices to average around $50/bbl next year, based on the assumption that economic woes would cap any significant jump in crude prices as seen in July this year. 

As a testament to the high level of uncertainty, few olefin players attempted to hazard a guess as to what was in store for the market next year, saying that any such exercise would be futile.

“Personally, I am a real bear for the moment,” said a Singapore-based trader, who along with other market participants, said the next few months would continue to be a tough trading environment.

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By: Peh Soo Hwee
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< previous article(ICIS Chemical Business podcast November 2, 2009)

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