INSIGHT: A tough year for NE Asia's naphtha-based PE makers

11 January 2012 16:54  [Source: ICIS news]

By John Richardson

Cracker turnarounds are expected to be light in 2012PERTH (ICIS)--The first quarter of 2012, and very probably the rest of the year, look likely to be very difficult for Asia’s naphtha-based polyethylene (PE) producers as a result of more competition from the Middle East in the vital China market.

The other big negative factor looks likely to be Chinese demand growth.

Early January has at least started with price recoveries.

Polyethylene (PE) spot prices for certain grades edged-up by $10-$20/tonne, according to ICIS assessments for the week ending 6 January.

“Offer prices for February cargoes are likely to be $50-80/tonne higher than those in January,” predicted a Singapore-based polyolefins trader.

But a reason for the price recovery is the margin squeeze being suffered by the naphtha-based producers.

“All of those in Asia dependent on naphtha for feedstock, even the well-integrated ones, are losing money at the moment,” said a senior executive with a global polyolefin producer.

“Price rises are therefore essential in order to recover some lost ground, which are fortunately being supported by some restocking among Chinese converters. The good news is that converter inventories are low.”

The ICIS Weekly PE Asia Margin Report indicates that conditions became particularly bad in the fourth quarter of last year.

For 2011 as a whole, integrated low-density PE (LDPE) margins were down 14% on the previous year as a result of a 30% rise in feedstock costs.

High-density PE (HDPE) integrated margins in 2011 were 20% lower.

High oil, and therefore naphtha, prices were obviously a huge factor in last year’s disappointments – with the threat of more pressure to come as a result of geopolitical influences on crude.

But it was the surge in cost-competitive Middle East PE exports to China that was also a major factor behind the margin squeeze, said several producers and industry observers.

“The Middle East had more volumes to place as a result of production being stabilised at several complexes that came on-stream in 2009-2010,” said a Middle East-based chemicals analyst.

As profitability declined for the naphtha-based players, so did volumes.

PE shipments from northeast Asia to China fell by 22% in January-September 2011 over the same period in 2010, as Middle East shipments rose by 21%, estimates Global Trade Information Services, the chemicals trade-data provider.

"In volume terms, high-density PE (HDPE) shipments from the Middle East to China were around 1.5m tonnes up until November last year. This compares with approximately 1.3m tonnes for the whole of 2010," added the chemicals analyst.

More volume is on the way.

Saudi Polymers is due to bring on-stream two 550,000 tonne/year high-density PE (HDPE) plants in the first quarter.

Qatar Petrochemical Co (QAPCO) is planning to bring its 300,000 tonne/year low-density PE (LDPE) unit on-stream in the first quarter of this year, delayed from the fourth quarter of 2011.

What could also be weighing on buyers’ minds - making them even more able to resist restocking - is the start-up of Saudi Kayan Petrochemical Co’s 300,000 tonne/year LDPE facility, which is due to take place in mid-2012.

ExxonMobil Chemical is officially scheduled to commission two 650,000 tonne/year PE lines, at Jurong Island in Singapore, in 2012. This will include metallocene grades of the polymer.

Another negative for supply, from the perspective of producers, is that approximately 16 crackers are scheduled to undergo turnarounds in Asia in 2012 as against 33 last year.

Based on the nameplate capacities of these crackers, lost ethylene production is estimated to be around 865,534 tonnes in 2012, down by more than 50% from 2011.

Returning to the increased pressure from Middle East shipments to China, pricing might not have been as competitive if demand had been stronger.

But extra volumes arrived in a market struggling to cope with much-tighter credit conditions, higher labour costs and a stronger yuan. The small and medium-sized enterprises (SMEs), which make-up the bulk of buyers of all types of resin in China, were hit the hardest.

This is likely to be reflected in PE imports, which, according to several estimates, will have fallen by around 4% in 2011 over the previous year.

In contrast, imports rose by 64.8% in 2009, according to China Customs. This illustrates the degree to which the 2009-2010 credit binge distorted demand.

The big hope for this year is that Beijing’s new “pro-growth” policy will make credit conditions easier. The policy was outlined at the government’s once-every-five-years National Financial Work Conference, which took place earlier this month.

In response to the conference, and to rumours of further cuts in the bank reserve requirement, the Shanghai Composite index had risen by 6.4% between Thursday of last week and Tuesday of this week – its best three-day performance in a year. The reserve requirement is the percentage of money against loans that the state-owned banks have to lodge with China’s central bank.

The rise in the stock market was behind a rebound in the Dalian Commodity Exchange’s futures contract for linear-low density polyethylene (LLDPE), added the Singapore-based polyolefins trader.

“The contract that settles in May rose by RMB500/tonne to RMB9,800/tonne [yuan (CNY) 500/tonne to CNY 9,800/tonne], which, hopefully, will be reflected in physical prices. Sentiment has definitely improved,” he said.

A further 150 basis points is likely to be cut from the reserve requirement in the first half of this year, said HSBC in a report released earlier this week. The requirement was cut by 50 basis points late last year.

“We (also) expect a larger new loan quota at around RMB8-8.5trn [CNY 8,000bn-8,500bn] over 2012 compared from 2011's likely actual new loans of around RMB7.5trn,” HSBC added in the same report.

But will this be enough to deliver the level of growth in China necessary to restore most of the PE business to good health?

Very probably not as too-radical a relaxation of lending conditions would reignite inflation, which was a major cause of increased social unrest in 2009-2011.

Further, the government will undergo a change of leadership that only occurs once every decade, beginning in October-November this year. This will lead to a cautious, moderate approach to economic policy, with no big changes from last year, as the old leaders retire and the new generation of senior Politburo members settles in, said several economists.

Most importantly of all, as much as 45% of PE imports are re-exported as finished goods.

Global growth prospects look the weakest since 2009, threatening China’s export trade.

It is hard to see how 2012 can be anything but difficult for Asia’s naphtha-based PE industry.

($1 = CNY6.31)

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By: John Richardson
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