INSIGHT: China PE market continues to show remarkable strength

08 August 2013 14:36  [Source: ICIS news]

PERTH (ICIS)--Reports continue about the remarkable strength of China’s polyethylene (PE) market.

Chinese PE demand growth is improving and tracking +12% YTD (year to date) through June, though we note against easy comparisons of +2% and -1% in 2012/2011, respectively,” wrote Morgan Stanley in a 5 August report.

“Reported Chinese PE demand increased by 19% in June against a 12% compared with June 2012,” the bank added.

“Production grew 16% YoY (year on year) and net imports increased by 22%.

“While industrial end-markets remain choppy in the region, PE demand has been a source of strength thus far.

“Possible explanations for the improved growth rate include: i) restocking activity following two years of weak demand growth in 2012 /2011; ii) increased demand for pre-packaged foods following publicised food safety concerns in China; and/or iii) rising demand for exports and packaging material from abroad.”

Operation Green Fence – the crackdown on imports of polluted scrap PE – might also be a factor behind the rebound.

China represents approximately 25% of worldwide ethylene demand, according to Morgan Stanley. Thus, this PE recovery seems to be a big deal, even it is being calculated off low bases in 2011 and 2012.

There have also been recoveries in monoethylene glycol (MEG) and purified terephthalic acid (PTA) prices.

The rebounds are attributed to:

*The strength of oil prices during July, which has, of course, affected many petrochemicals.

*Reports of stronger textile and garment exports to the West so far this year, and stock building ahead of what many in the industry think will be a good peak manufacturing season. Confidence in the renewed strength of the US and European economies seems to be high. (The peak manufacturing season runs from July/August until October/November. It is when Asian finished-goods manufacturers ramp up production ahead of Christmas in the West.)

*The plentiful availability of credit in China during Q1 of this year, which has fuelled increased speculation in MEG, the most speculative of all the fibre intermediates because it is easy to transport and store. Asia’s MEG prices were up by 16% in the space of just five weeks, according to the ICIS pricing assessment for the week ending 2 August.

*Easier credit conditions after China’s late June lending crackdown, which has led to the hope that Beijing has become more “pro-growth”. The mini-stimulus package, announced late last month, has further supported this idea. 

*A new-supply gap in PTA. Until the end of this year, there will be no further start-ups in China, which is allowing the market to absorb the 2012 sharp increase in additional capacity.

*The end of the 2013 MEG turnaround season, which occurred in Q2.

But returning to PE, some industry sources argue that the recovery can only be called real when higher-cost producers regain pricing power. Northeast and Southeast Asian integrated naphtha-based high density polyethylene (HDPE) margins remain comparatively weak.

And, despite claims that Asia is set to enjoy a good peak manufacturing season, thanks to a recovery in the West, it is easy to find evidence to the contrary.

“Growth in exports from seven of East Asia’s biggest exporters – Japan, China, South Korea, Taiwan, Thailand, Hong Kong and Singapore – slowed to a halt in the second quarter, according to national trade data compiled by Reuters, led by a 9% drop in exports to the European Union compared to a year earlier,” wrote Reuters in a 5 August article.

“Exports still represent the equivalent of roughly 35% of the region’s combined economic output. But the US recovery has been led by housing and shale gas investment, not demand for the electronics [and perhaps textiles] Asia’s factories supply,” said the wire service.

There has been no clear evidence of an improvement in China's textiles exports in the year to date, said an MEG industry observer.

“I think, in the case of MEG, there is a big speculative element here. In many ways, MEG has become just another financial instrument, where overall rallies in oil and other commodities drive activity, rather than the fundamentals of the polyester business,” he added.

Concerns are also being expressed that there is a bigger appetite for restocking across many classes of commodities in China because financial market sentiment has turned positive.

For example, iron ore prices rallied to a three-month high earlier this week, despite longer-term concerns over increased supply and weaker Chinese growth.

“The rally in iron ore prices comes amid broader strength in Chinese financial markets. The Shanghai Composite equity index has risen 3.6% in the past week, while Shanghai Futures Exchange steel prices have also strengthened,” wrote the Financial Times in a 7 August article.

But maybe there is something much more fundamental going on here, at least in the case of the steam cracker business in petrochemicals.

“Yes, there will be shale-based supply in the US.  However, that supply will not be ready until 2016/17 at the earliest,” wrote HSBC in a July report.

“In the immediate term, all of the six new world-scale crackers planned for start-up during the 2012/13 period are either already running or at best are one to two months away from commissioning.

“Over the next 18-24 months, incremental capacity growth is composed of [only] two conventional (non-coal-based) crackers. 

“This, in our view, marks the crest of the current supply wave. With demand improving and supply pressures starting to abate, we see room for margins to improve.”

Thus, HSBC believes that the current bleak position for Asia naphtha crackers is set to get better.

“We believe that naphtha crackers have the most upside potential from current levels, with the butadiene (C4) and aromatics (C6) chains being the biggest contributors,” continued the bank in the same report.

“Despite current demand woes, butadiene remains fundamentally supply constrained and all the 70% decline in butadiene prices over the past 15 months has done is scare away those interested in investing in ... butadiene capacity.

In the medium term, as auto and, by association, tyre demand return to more normal levels, the bank expects to see a sharp increase in butadiene spreads.

The same was broadly true for aromatics, particularly benzene, as a result of a combination of factors, including European cracker operating rate cuts and the use of more lighter feeds in the US thanks to shale gas, the report added. 

“We have yet to witness concurrent tightness in both C4 and C6 chains as weak demand has prevented both from occurring at the same time,” said HSBC.

“However, in the medium term we see both butadiene and benzene as tight relative to naphtha and believe that these product spreads have room to move up significantly, driving margin gains for naphtha crackers.”

Separating sentiment from the fundamentals is, of course, an essential job for chemicals company corporate planners. This job is becoming ever more complex because of the increasingly opaque interplay between macro-economics, overall movements in commodity markets and industry-specific supply and demand issues.

But, perhaps, it can be a lot simpler than all of the above.

“The answer to why some markets are better than others is that, in the better markets, there are more people wanting to buy than wanting to sell,” said an industry observer.

Additional reporting by Becky Zhang

By: John Richardson
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