Market outlook: China polyethylene market may be oversupplied in 2013

17 May 2013 09:47  [Source: ICB]

Polyethylene capacity is projected to rise by 12% in 2013 in a competitive market with rising imports. This could put downward pressure on prices

Players are pessimistic about the China polyethylene (PE) market outlook in 2013, as significant supply will increase with the commissioning of new plants through the year.


 The Chinese market will have to face supply pressure from new capacity, as well as a growth slowdown in downstream demand

Rex Features

Data from ICIS Chemease shows that China's apparent demand for PE was 17,985,400 tonnes in 2012, with local output accounting for 57%. This is known as the self-sufficiency rate. Apparent demand is expected to be around 21,030,000 tonnes in 2013, up by 16.9% year on year.

However, the China PE sector is going through a round of capacity expansions that will have a profound effect on the domestic market. Fushun Petrochemical's 800,000 tonne/year unit and Daqing Petrochemical's 550,000 tonne/year plant were commissioned in fourth quarter of 2012, with the impact on the domestic market to be fully felt in 2013. There were 23 PE producers in China by the end of 2012, with a total capacity of 11.95m tonnes.

Domestic output decreased by 4.8% in 2012 to 10,385,600 tonnes, according to ICIS Chemease, largely because most domestic producers, which are naphtha-based, were forced to run at reduced rates in the year due to high crude oil prices but falling PE values in the domestic market.

Even with the industry operating at reduced rates, more PE capacity is on its way. Qilu Petrochemical commissioned its 250,000 tonne/year HDPE unit in January 2013. Wuhan Petrochemical plans to start its 600,000 tonne/year new unit in May 2013. Sichuan Petrochemical will delay the start-up of its 600,000 tonne/year unit to July 2013.

China's PE capacity will increase by 1.45m tonnes to 13.4m tonnes by the end of 2013, if the three units come on stream as scheduled - a rise of 12.1% over 2012.

Domestic PE output rose by 8.9% year on year to 2,905,200 tonnes during January-March 2013, largely because of the start-up of Fushun Petrochemical and Qilu Petrochemical's new plants.

Together with the commissioning of some other new capacities in the first half of the year, this leads to an expectation of increasing output in 2013.

In addition, the number of PE producers in China will increase to 25 by the end of 2013. About 35% of China's PE capacity is affiliated to Sinopec, 38% belongs to PetroChina, 21% is owned by joint ventures, 4% is affiliated to local governments and 2% is from the coal chemical sector.

As for coal chemical enterprises, only Shenhua (Baotou) Charcoal Chemical has a 300,000 tonne/year high density PE/linear low density PE (HDPE/LLDPE) swing plant. However, it is heard that Shaanxi Yanchang Chinacoal Yulin Energy & Chemical will put its 600,000 tonne/year unit into production in early 2014.

Many coal-to-olefins (CTO) units will be built in the next two to three years. Under the background of high crude oil prices, the CTO units may take the lion's share in the new capacities, on the back of its cost advantage. However, whether these units will come on stream as scheduled remains unknown, as a result of environment protection and financial issues.

China is a large producer of PE, but an even larger consumer in the global market.

China's PE output only accounted for 57% in the country's total supply in 2012, while imports accounted for 43%, up by 2.61 percentage points versus 2011.

Therefore, market players have been concerned about arrivals of imported cargoes, in addition to the start-up of new and expanded domestic capacity. China's PE imports were at 7.888m tonnes in 2012, up by 6% from 2011, according to China Customs.

One of the two major changes in the nature of PE imports in 2012 was the amount of volumes by certain exporting countries.

Iran was the largest low density PE (LDPE) exporter to China in 2012 with cargoes of 424,400 tonnes, up by 124,500 tonnes from 2011, according to China Customs. Some participants were concerned that arrivals of Iranian cargoes would lead to an oversupply in the China market.

China's total imports of LDPE were at 1,571,100 tonnes in 2012, up by 110,800 tonnes from 2011, according to China Customs. The increase in Iranian cargoes exceeded the total import increase.

This means that Iran has taken some LDPE share from other countries. Imports from some other countries decreased along with the increase of Iranian material, leading to a balance in China's spot market.

One of the reasons Iranian PE flew into China in large volumes, according to some sources, was because of cost. Iran-based suppliers enjoyed a cost advantage, as their feedstock is mainly based on natural gas. These suppliers attracted Chinese buyers with relatively low prices.

Another reason was ample supply. Demand was weak in Iran, so most Iranian PE was used for exports. The supply to China increased following economic sanctions placed on Iran by western countries. However, there were also problems. The reliability of Iranian cargoes was uncertain, with many delays. Some Chinese traders said delivery of Iranian cargoes was scarcely punctual.

In addition, many traders indicated that they faced heavy capital pressures, as Iranian suppliers usually needed to be paid in cash due to the economic sanctions. Thus, Chinese buyers remained cautious towards purchasing Iranian cargoes.

The other major change in 2012 was in the nature of PE imports. PE volume by general trade totalled 752,500 tonnes from January to February 2013, accounting for 62.2% of total imports, up by 2.7% year on year.

The volume of PE via general trade rose to 4.680m tonnes in 2012, accounting for 59.3% in China's total imports - an increase of 18.9% from 2011.

General trade refers to importing raw material to make finished goods that are then consumed in the domestic market, rather than goods made for export.

Market players attributed this to higher domestic prices and lower imported prices. Chinese importers sold imported cargoes to China in view of arbitrage.

PE volume by general trade totalled 752,500 tonne from January to February 2013, accounting for 62.2% of total imports, up by 2.7% year on year. However, some participants pointed out that import prices were higher than those for most domestic cargoes. If that situation lasts, imported cargoes will lose market share, which will result in a decrease in general trade or even imports.

Some traders had different opinions. They expect import prices will eventually fall, if domestic prices keep dropping. Besides, the share of general trades may continue to rise if prices of Middle East-origin cargoes and deep-sea cargoes into the domestic market are comparatively low.

Market players are divided in their outlooks towards imports in 2013. An east China-based trader expects imports will decrease along with the start-up of new and expanded domestic capacity. A south China-based trader also expects imports will decline, noting that importers are reluctant to move cargoes to China because domestic prices were lower than overseas levels.

On the other hand, a Middle East-based supplier expects China's imports to increase, following the start-up of new and expanded overseas capacity. A south China-based trader believes that the Middle East-origin cargoes enjoy cost advantages compared with Chinese products, as the former's feedstock is natural gas, while over 97% of Chinese PE producers use naphtha as feedstock.

Market players said that the Chinese market will have to face supply pressure from new and expanded capacity, as well as a growth slowdown in downstream demand.

China's plastic output totalled 57.818m tonnes in 2012, up by 9% from 2011, according to the National Bureau of Statistics (NBS). The revised growth rate in 2011 was 18.6% year on year, according to the NBS. It can be concluded that output growth of China's plastic products slowed down sharply in 2012.

The Chinese government adjusted its monetary policies in 2012, aiming to lighten the burden on small to medium size enterprises (SMEs) by increasing liquidity, cutting the cost of credit and reducing taxes. However, demand from plastic processing industries remained weak.

Some market participants believe that demand from end-users will improve as the policies take effect, but that the growth rate may slow down.

The participants' pessimistic market outlook stemming from increased supply and end-users' weak appetite is reflected in LLDPE contract prices at the Dalian Commodity Exchange.

With increasing trade volumes at the Dalian Commodity Exchange, LLDPE futures prices have become an important reference for spot traders.

Many traders pay attention to the futures market in an attempt to increase their profits and reduce losses via hedging. However, the LLDPE futures prices fluctuate frequently, affected by the volatile financial market.

In general, the combination of LLDPE futures and spot prices has had an increasing impact on the domestic PE market.

As spot prices were higher than futures values for most of 2012, many cargoes originally planned to be delivered in the futures market flowed into the physical market and this dampened the spot prices.

As a result, most of the LLDPE/HDPE swing plants were either focused on HDPE production or ran at low rates for LLDPE, reducing domestic LLDPE output to 3,647,100 tonnes, down by 2.6% from 2011. In addition, China's LLDPE imports decreased by 6.1% year in 2012. Some participants expect domestic spot prices to be lower in the near term, if the situation continues.

China plays a key role in today's PE market, with developments in the country affecting wider markets. Keeping up to date with price and market changes in this highly influential region ensures you are able to seize opportunities by making faster and more profitable business decisions.

The ICIS China PE monthly report explains and analyses the demand, supply and price trends in China's domestic and imported PE markets. It also gives you a monthly review of production updates, inventory levels, exports and imports by region along with price spread analysis.

Author: Amy Yu and Chow Bee Lin

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