FocusMiddle East PE, PP producers to keep high run rates to end-Dec

13 November 2011 07:26  [Source: ICIS news]

By Ong Sheau Ling

SINGAPORE (ICIS)--Most of Middle East-based polymer plants are expected to continue running at near-full capacity for the rest of the year, as low production costs assure them of healthy margins even though polymer prices are on a decline, industry sources said on Thursday.

Given the cheap availability of ethane and propane feedstocks for polyethylene (PE) and polypropylene (PP) production, Middle East producers have the competitive advantage to offer at lower prices compared with their counterparts in Asia that mostly use expensive naphtha as feedstock, they said.

“We are still able to sell to our customers, although quantities have [been] reduced,” a key Saudi PE, PP producer said.

Saudi linear low density polyethylene (LLDPE) film was sold by producers at $1,140-1,160/tonne (€832-847/tonne) CFR (cost and freight) China, while South Korean materials were sold at $1,180/tonne CFR China for November cargoes, market sources said.

Spot LLDPE film prices in China slumped by $215/tonne or 15.6%  from early August to an average  of $1,160/tonne CFR China on 28 October, according to ICIS.

Ethane gas price in Saudi Arabia is fixed by the government at $0.75/mmbtu, while the price of propane gas is formulated with a discount on the naphtha price on a CFR Japan basis.

Middle East producers have the ability to undercut their counterparts from other regions to push out volumes, especially for PE grades, amid a dearth of buyers. Between ethane, which is used for PE production, and propane that goes into PP, ethane is more competitive, industry sources said.

“Demand in China is not improving and in the condition that the Middle East PE, PP facilities continue to run at high operating rates, it is not a good news to the market,” an Indian PE, PP producer said.

Concerns about the eurozone debt crisis, the weakness of the US economy and the slowing down of China’s growth, raise the spectre of another round of recession that has been hounding the commodities and equities markets.

“Christmas is just next month and the end of the financial year is drawing in. Demand in Europe will worsen further, with European and US producers clearing their stock levels, this will pressur[e] the Middle East producers to seek outlets further east, pressing down the prices there,” a Dubai-based trader said.

For a few of the producers hit by technical glitches that disrupted plant operations in the third quarter and those that suffered logistics problems because of congestions at the Dammam port in Saudi Arabia, and at the Khalifa and Jebel Ali ports in the UAE, plants must be kept running at high capacity to clear their backlog orders, industry sources said.

Saudi Arabia’s Advanced Petrochemical Company (APC) is currently running its two polypropylene (PP) units with a total capacity of 450,000 tonnes/year in Al-Jubail at almost full capacity, market sources said.

The plants resumed operations on 19 October after maintenance.

Middle Eastern producers are doing the exact opposite of production cuts being implemented by their South Korean and European counterparts amid lacklustre demand from key markets, such as China and Europe.

“I do not understand why the Middle East producers can still run at high operating rates, with demand being so weak. It is very puzzling,” an Indian PE, PP producer said.

In Europe, UK producer INEOS is making hefty cutbacks on low density PE (LDPE) and linear low density PE (LLDPE) assets and is likely to keep minimum operating rates at plants in the region for the remainder of 2011, company sources said. The company also plans to cut production of high density PE (HDPE), they said. 

In Asia, South Korea’s Polymirae will keep its PP plants at Yeosu running at a reduced rate of 90% in November given squeezed margins, while LG Chem plans to cut production at its PE and PP plants at Daesan and Yeosu in end-November or early December.

Asian producers currently generate thin margins from sales of LLDPE and LDPE films and it remains unclear whether these producers will reduce operating rates in the near term.

In the week ending 28 October, integrated LDPE margins in Asia have decreased by $96/tonne week on week to $171/tonne - the lowest since June 2009, while LLDPE margins were at $150/tonne, which only covers variable costs of production, according to ICIS.

Additional reporting by Chow Bee Lin

($1 = €0.73)

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By: Ong Sheau Ling
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