FocusAsia polyolefin players fear repeat of 2008 as market declines

16 May 2012 15:04  [Source: ICIS news]

By John Richardson

KUALA LUMPUR (ICIS)--Last week’s steep decline in Asian polyolefin prices has left producers and traders wondering when the market will bottom out.

Polyethylene (PE) pricing was down by $90-130/tonne (€71-103/tonne) with polypropylene (PP) $70-130/tonne lower for the week ending 11 May, according to ICIS.

But while the scale of the retreat was in itself shocking, the direction was nothing new - pricing has been mainly flat, or on a gradual decline, since the end of the Lunar New Year in late January.

“I have a dreadful feeling that this could be a repeat of 2008,” said a marketing executive with a global polyolefins producer.

“Back then, the Chinese didn’t buy for 4-5 weeks and everybody kept expecting them to all of a sudden return in big numbers.

“Of course, it didn’t happen and it is now 3-4 weeks since Chinese buying almost completely seized up.

“There is hardly any activity at all, just hand-to-mouth, and the traders are in no mood to take risks.”

A Singapore-based trader concurred, and he added: “I am going to remain mainly out of the market, other than perhaps speculating on the Dalian Commodity Exchange, until it is clear that things have settled down.” The exchange operates a futures contract in yuan-priced linear-low density PE (LLDPE).

“Demand remains absolutely dreadful, the worst I can remember in eight years in the business,” he said.

Saudi Arabian polyethylene (PE) producers had responded to the weak market by lowering offer prices to China on two occasions over the last few weeks, said an industry observer.

These lower offers, and a general decline in the market, had meant that naphtha-based cracker operators had gained no benefit from the recent decline in naphtha costs, he added.

The cost of naphtha has fallen on weaker crude.

“Saudi producers aren't worried about being able to sell their product as they are comfortable in their cost position. But they are worried about netbacks,” he continued.

This last comment is reflected in China’s PE imports duringg the first quarter. As the Middle East in general gained market share, thanks to its unbeatable cost position, Northeast Asian naphtha cracker operators lost out (see chart below, prepared by International eChem and ICIS).

China PE production and trade dataNow the hope is that the naphtha cracker players will cut back on production in order to support the market.

“Sinopec should take the lead and shut down a cracker for a couple of months. Lower operating rates in South Korea would also help,” added the marketing executive with the polyolefins producer.

But the benefits from any cuts in production would be reduced by the start-up of new capacities.

The Saudi Polymers complex in Saudi Arabia is due on-stream by the end of the second quarter. It comprises two 550,000 tonne/year high-density PE (HDPE) plants and a 440,000 tonne/year PP facility.

QAPCO is expected to start-up its 300,000 tonne/year low-density PE (LDPE) facility in Qatar by the end of May.

Saudi Kayan Petrochemical Co's 300,000 tonne/year LDPE plant is also due to come on-stream in Saudi Arabia in the third quarter.

The real story, though, is perhaps not supply, but rather the state of demand in China.

“Companies keep trying to put a brave face on things, but I feel that they know, in their heart of hearts, that something is really wrong but are not able, at the moment, to admit it,” added the marketing executive.

By: John Richardson
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