INSIGHT: China meets flood of methanol, PE, PVC imports

12 April 2009 22:00  [Source: ICIS news]

By Becky Zhang

SHANGHAI (ICIS news)--The old Chinese proverb, “men struggle upwards while water flows downwards” seems to apply perfectly to the flood of petrochemical imports that China has experienced since December 2008.

Methanol inventories were at an all-time high at the end of March, with polyvinyl chloride (PVC) imports forecast to be 2.3 times higher in 2009 compared with last year.

The local methanol and PVC industries are the most vulnerable, because they have seen their cost competitiveness decline as they have ramped up capacity. On paper, China is self-sufficient in both methanol and PVC.

Polyethylene (PE) is a different story. China imported 4.5m tonnes of PE last year, 40% of its requirement, according to the Shanghai-based CBI Research & Consulting.

“Protectionist sentiment has, nevertheless, spread to the PE sector with unverified rumours that an anti-dumping claim might be lodged. But there seems to be little possibility of a successful action because of this heavy reliance on imports,” said CBI polyolefin consultant Tao Hong.

China’s petrochemicals import volumes

Unit: '000 tonnes

Polyethylene (PE)

Methanol

Polyvinyl Chloride (PVC)

2007 monthly average

378

70

85

2008 monthly average (excl Dec 08)

364

97

67

December 2008

493

362

126

January 2009

480

403

129

February 2009

654

591

202

Data source: China Customs

But an application for an anti-dumping investigation into methanol was submitted by producers and the China Methanol Association to the Ministry of Commerce (MOC) early this year.

“The results of the investigation are expected in May. This is going to be a complex and time-consuming process because of many uncertainties, such as the level of historic prices and the potential for trade friction,” said CBI methanol analyst Ken Yin.

A reinvestigation into PVC imports from South Korea, Japan, Russia and Taiwan was launched in October last year by the MOC. This followed the expiry of five years of anti-dumping duties, which began in 2003.

The new investigation will last until 29 September 2009, during which time the original duties – ranging from 6% to 84% - will stay in place.

Petrochemical imports began to rise when the global financial crisis led to a slump in chemicals demand and high inventory pressures.

Overseas pricing fell faster than in China, creating strong arbitrage opportunities.

The result was that domestic pricing slumped below the break-even point of the local methanol and PVC players as importers scrambled to make money while they could.

The surge in methanol imports was also driven by speculation on booming electronic futures markets, according to CBI analysis.

China Liquid Chemical Transaction, Galaxy Merchandise Exchange and Zhangjiagang Chemical Electronic Exchange are the three major e-trading platforms, all located in eastern China.

“Half of spot trades flowed into e-markets. As a result, inventories of methanol at the ports reached an all-time high of 480,000 tonnes at end-March, which doesn’t include tanks in bonded zones and long-term contracts with end-users,” said Yin.

In 2005-2008, port inventories peaked at 300,000 tonnes with a low of 50,000 tonnes.

Local producers lost an average of yuan (CNY) 700/tonne ($102/tonne) during the first quarter this year, with both coal and natural-gas-based players idling plants and reducing operating rates.

This led to capacity utilisation falling to an average of just 30% in March, a CBI survey discovered.

Middle East production costs are well below $100/tonne, with other overseas players able to achieve a 10% return on investment provided prices are above $150/tonne, according to CBIestimates, with domestic costs far higher.

China coal-based methanol production cost and prices

China coal-based methanol cost

Data Source: CBI Research & Consulting

The price gap between local and international material widened to as much as CNY350/tonne in early December before narrowing to less than CNY100/tonne in late March, said CBI.

It’s a similar story for PVC, where calcium carbide-based producers – which account for 82% of China’s supply – have seen their cost position eroded.

The shift in competitiveness is the result of ethylene-based production becoming far more competitive than the calcium carbide or coal-based route due to the fall in oil prices, said CBI.

Since August 2008, the operating rates of domestic calcium carbide-based PVC plants have been at 30-50%.

“We do not see any signs of PVC imports declining in the coming months,” said CBI analyst Lynn Du.

“The anti-dumping duties have lost their effect because overseas competitors’ production costs are still below the Chinese producers, even after the duties have been added.

“PVC imports could reach 2m tonnes this year – representing 22% of 2008 demand and 2.3 times higher than last year’s shipments from overseas.”

But the good news for the Chinese petrochemical sector is that PE is in a far better position because Sinopec and PetroChina made big refinery operating rate cutbacks during the first quarter.

This has resulted in reduced naphtha supply and therefore cracker operating rates, leading to a rise in imports that were essential to keep the market adequately supplied.

PE imports appear to have peaked at the end of February as Middle East and Southeast Asia supply has since tightened on reduced operating rates and turnarounds.

However, ICIS news has reported on the increase in cargoes from the US to China that are due to land in April and May, some of which could be speculative.

Unconventional shipments from Libya and Russia are also being discussed in the market, with volumes from Iran said to be higher than usual, according to the CBI pricing team.

Still, though, the Chinese economy might have bottomed out thanks to increasing credit and the huge government stimulus package.

Crucially, there are signs of the real economy picking up in response to easier lending and government spending. For example, the country’s Purchasing Managers’ Index rose to 52.4 in March from 49.0 in February.

But high inventory levels in some product chains – partly resulting from speculation – could represent a threat to sustained higher pricing.

For more on methnol, PVC and PE visit ICIS chemical intelligence
To discuss issues facing the chemical industry go to ICIS connect


By: Becky Zhang
+65 6780 4359



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