OUTLOOK ’12: PO prices less bullish on worries of weaker demand

09 January 2012 01:00  [Source: ICIS news]

By Jingyi ChanPropylene oxide is used in the manufacture of polyurethanes (source: Bayer)

SINGAPORE (ICIS)--Market participants in Asia are toning down their bullish first-quarter forecasts for propylene oxide (PO) because of the uncertain macroeconomic outlook and worries about oversupply and weaker demand from China, the region’s largest PO consuming nation.

Market players originally expected total PO demand in China to grow to above 2.2m tonnes in 2012, up from around 1.85m tonnes in 2011.

However, Asia’s demand for PO is expected to drop because global economies are still grappling with substantial downside risks such as laggin

GDP growth momentum as well as low business and consumer confidence, while China is still maintaining a prudent monetary policy, despite a recent cut in its bank reserve requirement ratio.

In addition, the tight supply conditions seen in 2011 have eased as operations at key facilities resumed and commercial production at new PO plants, including Dow Chemical’s 390,000 tonne/year PO unit in Thailand have started successfully.

As a result, total PO imports to China rose to 41,437 tonnes in November 2011. The figure is a 69% month on month increase and an almost three-fold rise from the previous quarter. A similar trend is expected for December, but customs statistics are not yet available.

The increase in supply exerted downward pressure on the spot PO market, causing prices to fall by as much as $400/tonne (€312/tonne) within weeks in December 2011, ICIS data showed.

In December, PO prices dropped to a one-year low of $1,500/tonne CFR China, according to ICIS data, narrowly breaching what market players said was the breakeven level for many producers, before rebounding to around $1,600/tonne in end-2011 on the back of pre-holiday restocking activity.

Asian PO prices are likely to remain at above $1,600/tonne CFR China this year, as they did in 2011, industry sources said.

However, there will be price deviations of around $100-300/tonne this year, corresponding with changes in market sentiment and the demand-supply balance.

Spot PO prices fluctuated at a wider $300-500/tonne range in 2011 because of tight supply and rose to above $2,000/tonne in the aftermath of the March earthquake in Japan, as market players panicked when regional supply chains were disrupted.

The industry was then hit by several planned and unplanned plant shutdowns in April-September at key PO facilities in the Middle East, Singapore, South Korea and China and regional supply became extremely tight.

“With one abrupt shutdown after another, it was just as unpredictable as the weather,” said a source from a polyether polyols producer.

“The shortages disrupted our production schedule and we had to put our expansion plans on hold as well,” he added.

At that time, Chinese industry sources estimated the total shortfall in supply to be at around 200,000 tonnes for 2011.

The annual shortage was expected to increase to 300,000 tonnes in 2012 because of strong growth estimates in demand from the key downstream polyether polyols industry, even after new PO capacity additions were factored in.

However, when PO prices rose to a record-high $2,100/tonne CFR China in August, and again in October, players became worried about the sustainability of prices.

Chinese PO buyers, such as those in the key downstream polyether polyol and monopropylene glycol (MPG) sectors, were also feeling the pinch of the liquidity crunch at home as financing costs escalated.

Downstream companies also faced a double whammy as they were unable to pass on the full hikes to their own customers, because of China’s property cooling measures and weakening demand from key export markets Europe and the US.

This has led to market players becoming wary about further increases in PO prices.

“PO prices are unlikely to revisit levels in the $2,000s/tonne CFR NE Asia in the coming months,” a China-based trader said in Mandarin, adding that supply and demand will be more balanced this year.

China’s aggregate domestic supply of PO was estimated at around 1.57m tonnes in 2011, while imports were estimated at 320,000 tonnes, according to market sources.

The nation’s total output could increase to around 1.70m tonnes this year, while imports could rise to above 400,000 tonnes, depending on the operating rate at regional PO facilities.

The trader in China added that buyers were less worried about supply disruptions this year, with a handful even saying that the industry could be heading towards overcapacity if the global economy deteriorates further and causes derivative demand to weaken.  

Additionally, overall demand from the key downstream polyether polyols industry is expected to remain healthy, but the growth rate in 2012 is unlikely to be as high as initially expected, market sources said.

“Should we experience unexpected supply outages again, the situation would still not be as bad as that in 2011 because of all the additional PO capacities we now have,” the trader said.

“Any price increase because of supply tightness could attract regional PO facilities to ramp up their output, hence restoring balance to the market more quickly,” he added.

($1 = €0.78)

For more on propylene oxide, visit ICIS chemical intelligence
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By: Chan Jingyi
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