INSIGHT: Struggling Europe/US producers cry: 'To China, to China!'

07 December 2011 16:04  [Source: ICIS news]

By Bohan Loh and Pearl Bantillo

SINGAPORE (ICIS)--European and US petrochemical producers facing lacklustre product sales in their domestic markets have started to move large volumes to China.

Since November, the world’s second largest economy has become a magnet for European and US-produced aromatics and related products, for example, despite the lack of a clear opening of any arbitrage window.

Record volumes of paraxylene (PX), mixed xylenes (MX) and monoethylene glycol (MEG) were moved to Asia in the month, with China receiving the bulk of shipments.

A similar pattern is emerging for December. Shipping fixtures and enquiries for a total of 65,000 tonnes of November/December loading PX have been heard from majors such as BP and ExxonMobil.

BP has been shipping out PX since it shut some of its downstream purified terephthalic acid (PTA) plants in the US and Europe.

The PX volumes generally have been staggering considering that less than a quarter of the amount was shipped to China in the first 10 months of 2011.

China is the preferred market for petrochemicals simply because it can still digest them: its economic growth remains at high single-digit levels despite a noticeable slowdown.

In the third quarter, the Chinese economy grew at 9.1% compared to growth of 3% in the US and a measly 0.2% in the eurozone. Petrochemicals flow to where demand is still relatively healthy and not to debt-troubled Europe or a weakly growing US.

China’s GDP growth this year is forecast at 9.5%, while the US economy is expected to grow at a 1.5 % and the eurozone at a 1.6% according to the International Monetary Fund’s (IMF’s) World Economic Outlook.

Product prices, in such circumstances, are not a big factor, as long as products get sold. And the pressure is on producers towards the end of the year as they tend to monetise inventory.

“The downstream PET and polyester yarn spinning industries in the US and Europe have slowed down very significantly due to lacklustre demand. The domestic markets simply cannot digest so much PX and MEG,” said an industry source.

When queried about cross-Pacific shipments, an ExxonMobil spokesperson declined to comment, saying they did not discuss commercial or trade arrangements.

"ExxonMobil operates globally; supply and logistics optimisation is part and parcel of how we do business. We continually evaluate how best to employ our global assets and capabilities,” the spokesperson said.

According to data from consultants PCI, 1.85m tonnes of PTA capacity in Europe was shut for between 2 and 10 days in September to November, while 1.59m tonnes of US PTA capacity will be shut for a total of 15 days in December because of poor margins.

For MEG, the increase in volumes of cross-Pacific shipments was even more pronounced. Nearly 60,000 tonnes of November and December cargoes from the US were heading towards China, about 80% of the 75,417 tonnes of MEG that the country received over a 10-month period this year.

“Demand for PET and polyester yarns are really poor in Europe and the US, I don’t think they [producers] have any choice but to find outlets in Asia. I don’t think the majors are about to let prices in their domestic markets crash,” a northeast Asia PX trader said.

This influx of deep-sea shipments is weighing on prices in Asia, which also looks to China to take up most of the region’s products.

Benchmark spot MEG prices have lost nearly 14% since early-October and stood at $1,055-1,070/tonne CFR China Main Port (CMP) for the week ending 2 December according to data from ICIS. PX prices declined nearly 11% over the same period to $1,390-1,392/tonne CFR CMP.

But China’s economy is also weakening, as evidenced by the quarterly deceleration, which is expected to continue into next year. The slowdown has triggered a policy response from the central bank to prevent a hard economic landing.

The IMF forecasts that China’s economy will grow at a slower rate of 9.0% in 2012, while eurozone growth will further slacken to 1.1%. The US, on the other hand, might be able to grow slightly faster, at 1.8% next year, according to the IMF’s September projections.

China had been deliberately putting the brakes on its economic expansion via monetary policy tightening but on 5 December this year its central bank cut the reserve requirement for banks by 50 basis points to address a domestic credit crunch.

A prolonged recession in the US and Europe would significantly drag down Asia’s emerging economies, including China’s, the Asian Development Bank (ADB) has warned.

For China, the ADB, in its December Asia Economic Monitor report, forecasts a slower GDP growth rate of 8.8% in 2012 and 9.3% this year.

Asia will not escape unscathed from a severe slowdown in the west, but the region will remain on a relatively stronger footing, economically speaking. Asia, and its brightest star China, however, will not completely compensate for the slackening of demand across the rest of the world.

Lester Teo contributed to this article

Read Paul Hodges Chemicals & the Economy blog
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By: Bohan Loh
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