Asian polyolefin margins to remain healthy up to Q3 – consultant

22 January 2010 02:54  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--Asian polyolefin producer margins should remain healthy until the third or towards the fourth quarter of this year, by which time new supply is likely to cause a decline, said Mazlan Razak, Kuala Lumpur-based consultant with DeWitt & Co.

“And when I say a decline in Q4 it will only be relative to much stronger returns than had been expected. By then also, the global economy should have further recovered to help ease the supply overhang.”

The total disaster expected for 2008 and early 2009 – the arrival of huge amounts of capacity when the world economy was at its lowest point – seems to have been avoided, Razak added.

This is the result of numerous delays to the start-up of new projects and problems in operating plants that have been recently commissioned. Reasons for a staggered introduction of the big new volumes include lack of experienced engineers to start up and run these complexes, said several industry sources.

Constrained new supply – resulting from problems in operating both recent start-ups and well-established plants – has continued into the New Year.

ExxonMobil will be forced to shut down its cracker at Jurong Island in Singapore for two weeks in February in order to correct technical problems, said the US energy major’s customers. This has resulted in February polyethylene (PE) allocations being cut by 20-30%, they added.

Production losses have also occurred in northern China as result of the recent cold weather, which has occurred at the same time as several turnarounds, according to an ICIS Insight article last week.

“The price rally we’ve seen in the New Year has been driven both by these supply problems and the rise in crude. December was supposed to be a quiet period, but as oil increased so did buying into January as end-users stocked up ahead of potential further cost increases,” said Razak.

Particular tightness has occurred in low-density polyethylene (LDPE) as a result of production issues and lack of new capacity, he added.

“I also think that a shortage of hexene-1 and butene-1 co-monomers has contributed to tightness in linear-low density (LLDPE). This is a result of lack of new capacity,” he said.

A further factor behind the LLDPE price and margin surge is that up until August last year high-density PE (HDPE) pricing had been higher than that for LLDPE film for several months, the petrochemicals consultant continued.

“But since August (see ICIS pricing chart below) this has reversed. Operators of swing plants – that can make either HDPE or LLDPE – have yet to make sufficient adjustments.”

Towards the end of the first quarter output from the new PTT Chemical complex and other recent start-ups, including the new Sharq plants in Saudi Arabia, would add length to the market, he added.

But he predicted that from March the start of the turnaround season will provide a counterbalance. Twenty two crackers are due to shut down in Asia this year compared with 15 in 2009, according to an earlier report on ICIS news.

So he sees the downside as limited until the third or fourth quarter when production at new plants already started and those still due to come on-stream this year should have been increased.

Further start-ups in 2010 include the giant Borouge complex in Abu Dhabi and the Ras Laffan Olefins Co cracker and associated downstream plants in Qatar.

Polypropylene (PP) saw less supply constraints in 2009 because of the successful start-up of more new capacity than in PE, including several PP plants linked to refineries in China, said Razak.

“As a result, PP profitability has not been as good as PE – although it has been reasonable. Again, I expect further new supply has the potential to create the most problems for PP in Q4,” he said.

On the demand side, although the global economy should further improve this year, he sees risks to polyolefins from less speculative activity in China as a result of monetary tightening.

Last week China announced an increase in the reserve requirement for big commercial banks with more measures, including higher deposit and/or lending rates, possible in 2010.

And yesterday Chinese regulators ordered banks to temporarily halt new lending.

“The last time China tightened liquidity in 2007 we saw a dip in PE imports. The imports fell to 4.6m tonnes in that year from 4.9m tonnes in 2006.”

Traders have used easy lending conditions to speculate in polyolefins, other commodities and real estate, boosting sentiment, he said.

“And the Dalian Commodity Exchange’s futures contract in LLDPE is leading the physical market as PE becomes more speculative.

Dalian plays the same role as Nymex for crude oil, meaning that Dalian often moves on sentiment and speculation rather than on fundamentals.”

To discuss issues facing the chemical industry go to ICIS connect
Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

By: John Richardson
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