FocusAsia’s PE makers face margin squeeze in H2 2010

01 April 2010 07:59  [Source: ICIS news]

By Chow Bee Lin

SINGAPORE (ICIS news)--Polyethylene (PE) producers in Asia are bracing for thinner margins in the second half of 2010 due to fierce competition from cost competitive Middle East supplies and high crude oil prices, industry sources said on Thursday.

"We still have some margins now but I’m concerned about what’ll happen in the second half of the year. It really depends on whether gas-based producers in the Middle East will flood the Asian market with cheaper material,” a naphtha-based PE producer in southeast (SE) Asia said.

PE margins had been on the decline since hitting a four-month peak of $464/tonne (€343/tonne) and $487/tonne in February, for northeast (NE) Asia and southeast (SE) Asia respectively, said Larry Tan, ICIS Manager for Data & Analytics.

"Margins for crackers and PE plants in Asia, while on the decline, are not likely to fall off sharply in the second quarter. Many crackers in the region will shut for maintenance during this period. But things are looking less attractive in second half of the year due to a slew of capacity additions,” he said.

Integrated PE producers’ margins were estimated at $413/tonne in northeast Asia for the week ended 26 March, said Tan, calculated based on key variable costs, co-product credits and product yields, and the average value of injection grade high density PE (HDPE).

About 4.7m tonnes/year of PE capacities were expected to start up in Asia and the Middle East this year, according to industry estimates.

Furthermore, around 9.5m tonnes of new ethylene capacity was expected to come on stream in Asia and the Middle East this year, ICIS data showed.

"Naphtha cracker margins were more compressed than the ethylene-to-PE chain in the last industry downturn in the early 2000s. It remains to be seen if the same would occur in the second half this year,” said Tan.

The SE Asian naphtha-based PE producer said he feared that PE margins might bear the brunt of the impact when the industry faced its next downturn due to a less favourable demand-supply dynamics.

"Back in the early 2000s, naphtha crackers were running below 85% capacity due to a long ethylene supply, global PE operating rates were on average above 85% and most importantly, the China market was just opening up. But the China market looks a bit saturated now,” he said.

To avoid head-on competition with lower-priced Middle East material, some naphtha-based PE producers in NE Asia had switched to grades that are not so widely produced in the Middle East such as yarn and pipe grades high density PE (HDPE).

"The new Middle East plants have been exporting mainly film, injection and blow moulding grades HDPE to Asia,” a NE Asian producer said.

($1 = €0.74)

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By: Chow Bee Lin
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