INSIGHT: Polyethylene producers experiencing mixed fortunes

20 June 2012 11:25  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--It is not all doom and gloom, far from it, as the slide below illustrates. While northeast Asian polyethylene (PE) producers continue to struggle, the variable cost margins of both their US and European competitors have improved.PE graph 2

And in the face of persistent weakness in the China market, a further worry for the northeast Asians is that increased volumes of US PE are reportedly about to head east.

“US demand has weakened and local producers have large stocks, whereas inventories among converters in China are low,” said an industry source.

“The arbitrage opportunities are strong. I think, therefore, that the US will try to regain some of the market share it has lost in China during Q3.”

From January to May this year, North American Free Trade Agreement exports to China declined by 61% compared with the same periods in 2011 and 2010, according to Global Trade Information Services.

European margins have been buoyed by low naphtha costs and favourable exchange rates for exports, according to ICIS.

A lot of PE and polypropylene (PP) is being exported for example, one producer plans to double its PP exports.

Some European producers have been considering production cutbacks but for most of the producers margins have been too good to curtail output.

There are, however, widespread expectations of falls in July ethylene and propylene contract prices which could impact margins and force rate cuts.

Northeast Asian producers have already made substantial production cutbacks. For instance, South Korean cracker operators have reportedly lowered operating rates by 510% and Formosa Petrochemical Corp closed its 1.2m tonne/year No 3 cracker complex for about two weeks earlier this month.

“It is not enough. I think we have reached the point where we need long-term capacity closures,” the industry source added.

“The problem is that there is too much supply chasing too little demand and, therefore, the higher-cost commodity-grade producers are being squeezed out.

“We had expected full-year PE demand growth in China to be around 8%, in line with GDP growth. Now we are expecting flat to minus 5% growth for 2012.”

The higher-cost northeast Asians can only make good money when China is booming, and this is clearly not the case now, according to HSBC in a report released on Tuesday 19 June.

And, sadly, the bank argues that inventory levels are not low by historical standards and, as a result, the bottom of the market has yet to arrive.

“Despite over a year of weak apparent consumption growth [production plus net imports], the cumulative levels of inventory within the system are well above their average of 1.5m tonnes over the last decade,” said HSBC.

This was the result of the huge amount of stock that had been accumulated during 2009-2010, when China implemented a yuan (CNY) 4,000bn ($628.93bn) stimulus package, along with an estimated CNY9,600bn of new bank lending – equivalent to around one-third of the country’s GDP. This was designed to offset the impact of the global economic crisis.

“While it is amply clear that there has indeed been a destocking cycle since Q1’11, the real key is the massive restock that occurred post Q4 ’08, driven, in our opinion, by the large stimulus undertaken by the Chinese government and the environment of cheap credit,” added the bank.

“The data also illustrate the mini restocking cycle in Q1’12, which drove expectations around a demand bounce but was quickly followed by another round of destocking, which continues to date.”

HSBC, while agreeing with the industry source that converter inventory levels are low, believes that this is the not case with the traders.

“While traders have been influential within the Asian resin markets for a while, we can trace the shift to a predominantly trader-led resin market in terms of influence back to the early days of the post-stimulus period in 2009,” said HSBC.

“Key points to bear in mind are that the big departure of apparent consumption from GDP growth only started in 2009, post-stimulus.

“This correlates with the spike in futures volumes of linear-low density PE [LLDPE] on the Dalian Commodity Exchange and, anecdotally, with what one hears about Chinese traders using commodity imports as a source for financing.

“It also correlates with what we know of commodities where inventory data is readily available – for copper for example.

“Furthermore, we are increasingly seeing large re-export offers from China of Saudi and other Middle Eastern product, which almost certainly implies large levels of trader inventory.”

This all helps to explain a conundrum that has not just affected PE, but also the other synthetic resins: Demand growth well below the increase in overall GDP.

Demand growth for PE, PP, polyvinyl chloride (PVC), polyethylene terephthate (PET) and acrylontrile butadiene styrene (ABS) had averaged just 2.7% since the first quarter of last year, compared with a 9.1% increase in GDP, said HSBC.

And the bank’s analysis further helps to explain why Asian polyolefin traders have, at the moment, little else to do with their time other than bet on the Euro 2012 soccer championships.

($1 = CNY6.36)

Read John Richardson and Malini Hariharan's Asian Chemical Connections blog

By: John Richardson
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