INSIGHT: Asia PE producers cautious in uncertain markets

16 August 2010 18:25  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS)--It always seemed as if the Asian polyethylene (PE) price rebound was built on a house of cards.

The Chinese economy is slowing down, the country’s domestic production has greatly increased and new capacity in the Middle East – though still plagued by start-up and operating problems – is now starting to arrive in much bigger volumes.

Hence the Asian PE report released by ICIS on 13 August, which revealed that, despite further moderate price rises, Asian producers were, at best, “cautiously optimistic”.

This followed the previous week’s bigger price surge (see chart below) on temporary production issues.

 

These included ExxonMobil's outage at its 600,000 tonne/year PE plant in Singapore and the impact of the fire and shutdown at Formosa Petrochemical Corp's No 1 cracker at Mailiao, Taiwan, on ethylene and derivative markets. The cracker is not expected to be back on stream until late September or early October.

A collection of other temporary factors could play a big role in supporting ethylene and therefore PE markets over the next few months – or could swing the other way and make conditions a lot worse.

First, with ethylene, the spot market in Asia has, on paper, become a great deal longer because of a 150,000 tonne/year surplus at Shell Chemicals in Singapore. The Shell cracker, which came on stream in March, is structurally long on C2s.

Lengthy problems in stabilising production of new derivatives capacity from crackers in the Middle East could also lead to more merchant ethylene.

Reasons for the six to nine months it can take to stabilise operations include manpower shortages and the huge scale and complexity of what’s being commissioned.

Iran is also structurally long, by as much as 40,000 tonnes/month.

A further difficulty is that plants can, of course, suffer outages. This was the case with the recent report of a big, high density PE (HDPE) facility in the Middle East, which was brought fully on stream last year.

The producer in question was forced to sell 30,000 tonnes/month of ethylene for three to four months – a big reason for the ethylene price declines before the Mailiao outage, an olefins trader said.

The perception is that this current wave of capacity from the Middle East is more susceptible to outages than the previous one, for reasons that are best not to go into in print.

Spot pricing in Asia helps set what consumers pay on contract for their ethylene (term or contract sales account for well over 90% of the region's total consumption), and there are only a handful of spot deals in this region each week. So an extra few cargoes can make a great deal of difference to ethylene pricing.

But feedstock shortages in Saudi Arabia have greatly reduced the country’s merchant ethylene sales.

February was the last time ethylene was loaded from the Al-Jubail site in Saudi Arabia, and even then it was only 5,000 tonnes, according to Joe Duffy, petrochemicals consultant with DeWitt & Co.

“Historically, Al-Jubail has been exporting 20,000-40,000 tonnes/month. Essentially, 500,000 tonnes/year of exports have gone to zero,” he added.

Iran's ethylene shipments can also dip very sharply when the power sector and the country's other users of natural gas leave petrochemicals short of feedstock.

Whether Iran can achieve the investment in gas infrastructure to solve this problem is a moot point, given the current issues surrounding sanctions.

Another negative – or positive, depending on which side of the fence you sit – is that increasing demand for long-haul cargoes is creating repositioning problems for ethylene vessels.

Lack of sufficient vessels is also expected to result in higher C2 freights until the end of next year, limiting arbitrage.

“Freight rates are on the rise and could go a lot higher. The Singapore-to-Taiwan rate was, for example, $100/tonne (€78/tonne) in June and has risen to $125/tonne in August,” added the olefins trader.

The long-running butene-1 shortage continues to significantly restrict linear low density polyethylene (LLDPE) supply 

A wider disparity in container freight rates is benefiting the European PE industry, while hurting Asia.

“We usually see around 30% of Middle East polyolefins moving to Europe with the rest to Asia, but a bigger gap in rates to Europe is resulting in a higher percentage heading this way,” said a Singapore-based source with a global polyolefins producer.

“Because of the dramatic recovery in global trade, the gap between freight rates on the European routes to the Middle East compared with China has widened,” he added.

“This is the result of China’s dominance in low-end manufacturing, creating more fully occupied container space to and from the Middle East and China.”

The outlook for European polyolefin demand remains uncertain, but supply has long been tight.

Limited PE and polypropylene (PP) supply was at first the result of deep operating rate cuts when the 2008 financial crisis began – and then also the rapid Chinese economic recovery, which enabled Europe to export significant volumes.

European polyolefin exports to China have since fallen due to displacement by new capacity from the Middle East and China.

But Europe remains tight because of continued operating-rate discipline and the high freight rates that are discouraging buyers from acquiring Middle East material, an industry observer said.

“European PE prices were recently as much as $400/tonne above those in Asia, but that was still not enough to attract Middle East shipments,” he added.

The longer all these temporary factors continue the longer producers might be able to squeeze out decent returns.

But the problem remains that an awful lot of surplus capacity still needs to be absorbed by a stuttering global economy.

“We haven’t seen the worst of things yet. More permanent shutdowns by higher-cost Japanese and other producers are clearly needed,” said a second source with the same global polyolefins producer we referred to earlier on.

People have been saying this for years, though, and plant closures are easier said than done for a myriad of reasons.

But the source made a good point when he added: “Rate cuts and permanent closures might occur if price reductions are $50-100/tonne per month rather than the increases we have seen of late.

“Otherwise, we could be struggling with fundamentally long markets throughout next year, with a recovery only occurring in early 2012.”

However, if you are higher cost, why not limp through until 2012, given that you might well have loads of money in the bank from the boom period?

($1 = €0.78)

For more on polyethylene visit ICIS chemical intelligence
Read John Richardson and Malini Hariharan's Asian Chemical Connections blog
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By: John Richardson
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