FocusAsia petchem demand to stay strong despite $100/bbl Brent crude

01 February 2011 04:32  [Source: ICIS news]

By Nurluqman Suratman and Felicia Loo

SINGAPORE (ICIS)--Asia’s petrochemical prices will remain underpinned by strong fundamental demand coming from energy giant China, even as global Brent crude futures pierced the $100/bbl (€73/bbl)-mark on concerns that Egypt’s political unrest could lead to oil supply disruptions, industry experts said on Tuesday.

At midday Tuesday, Brent crude for March delivery was valued at $100.43/bbl, after breaking above $100/bbl for the first time since October 2008 on Monday.

The oil price rally was a stark reminder of July 2008 when prices soared to an all-time peak of $147.27/bbl, and a few months later in December, plummeted to $33/bbl because of the global recession.

Asia is still expected to guzzle a colossal quantity of petrochemical products, with prices seen buoyant, and undeterred by feedstock naphtha levels at a 28-month high of $894.50-897.50/tonne CFR (cost and freight) Japan on Tuesday.

”Rising crude oil prices will be offset by rising petrochemical prices, so the spread would be well-preserved and the overall impact on profitability for (chemical) companies would be minimal,” said Gordon Kwan, head of energy research at Mirae Asset Securities in Hong Kong.

“We expect Brent crude oil prices would average at around $100/bbl this year,” he said.

Prices would remain at such levels, with China still expected to import record volumes of crude oil, and other rising Asian economies setting the pace for oil consumption, Kwan said.

As the Chinese economy continues to gallop at a high single-digit growth, its petrochemical demand would remain unabated, traders said.

“Demand is still good,” said an oil trader in Singapore.

China’s GDP grew at a faster pace of 9.8% in the fourth quarter of 2010, while inflation slowed to 4.6% in December. Overall, the world’s second-biggest economy grew by 10.3% in 2010, up from 9.2% in 2009.

“I think it is more important to look at the demand for petrochemicals rather than oil being at the $100/bbl mark. As long as there is demand for petrochemicals there would not be any negative surprises for the sector,” Kwan said.

Fundamentally, there was real demand for petrochemicals in China, the world’s top energy user, traders said.

At the Dalian Commodity Exchange (DCE), linear low density polyethylene (LLDPE) futures tracked crude’s gains, rising 1% on Monday.

Trading typically slows down in China ahead of the week-long Lunar New Year celebration that will start this Thursday, but most petrochemical players were bullish that product prices would remain on an uptrend after the holidays.

Restocking activity would provide an impetus for polyethylene (PE) and polypropylene (PP) prices in China to move further up.

For styrene, tight supply was expected to remain for the whole of 2011 in Asia, sparking off higher monomer prices, traders said.

China’s downstream styrenic plastics expansion at around 2m tonnes was five times larger than the expected 400,000 tonne/year increase in styrene monomer production this year. Moreover, Mitsubishi Japan will permanently exit styrene monomer business in Japan in April this year, and this will further squeeze supply.

In December 2010, China’s annualised olefins imports rose because of a domestic supply crunch and the growth in imports is expected to continue this year since no big petrochemical complex will start up in the country amid strong local demand.

Ethylene imports in December jumped 37% year on year to 88,445 tonnes and butadiene imports grew 67% to 38,727 tonnes, according to data from China Customs.

Naphtha imports soared 22% year on year and 23% month on month to 406,738 tonnes in December, the data showed.

A caveat remains if Beijing tightens its monetary policy, analysts argued.

“Any surprises, such as China revamping its lending rate drastically, could hit the sector really hard,” Kwan said.

Borrowing costs in China were expected to increase further in the country's bid to prevent consumer and asset prices from shooting up.

“As long as the US and the European Central Bank maintain a benign interest rate and China having sustainable growth, petrochemical margins would be preserved despite high crude oil prices,” he said.

($1 = €0.73)

Additional reporting by James Dennis

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections
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By: Felicia Loo

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