By John Richardson
THE steep decline in Asian ethylene margins - detailed in the chart below from the ICIS pricing weekly margin report - seems to be largely the result of the worrying state of China's polyethylene (PE) market, which we discussed yesterday.
"The Saudis have reduced their PE operating rates, resulting in an increase in the availability of merchant ethylene," an industry observer told the blog today.
A longer-term factor is the surplus from the Shell Chemicals complex in Singapore. Shell switched from being a net buyer to being a net seller of C2s earlier this year when its 800,000 tonne/year steam cracker was commissioned.
Ethylene margins in Northeast Asia (NEA) had recovered to $161/tonne on 25 June from $101/tonne on 18 June on cheaper naphtha, according to the ICIS report.
(Note that PE margins look far better - for example, NEA integrated high-density injection-grade PE margins were $262/tonne on 25 June, again according to ICIS, but still down on a first-quarter average of $357/tonne. But the crucial issue right now for PE is volumes due to the inventory overhang in China)
Despite the recovery in ethylene margins on 25 June, the NEA average for Q1 was $474/tonne with the downtrend ominously paralleling that which occurred in 2001.
"We saw a similar steep decline in that year, ahead of an extended period of poor returns on oversupply," said Larry Tan, Director, Data & Analytics (Asia) for ICIS pricing.
"The nameplate capacity due on-stream for the remainder of this year is in excess of likely global growth."
He, of course, accepted that - as we have seen repeatedly over the last 18 months - start-up delays and OPEC oil output restrictions that have reduced feedstock supply to existing Saudi Arabian plants - could change the picture.
Operating rate discipline in the West has also been ferocious.
But many senior industry sources at last month's APIC conference in Mumbai warned the blog that the bigger danger was the economy - which is proving to be the case.
A plethora of economic problems have combined over the last few days to suggest that we could be heading for a douple-dip global recession.
These include growing concerns over whether China is suffering a significant slowdown on government economic cool-down measures.
The Conference Board, the New York-based research organisation, yesterday downgraded its economic indicator for China on falling construction activity and export orders.
"The rising trend of the [index] has been moderating since the middle of last year, suggesting there is no strong basis for assuming accelerating growth," Bill Adams, resident economist for the Conference Board China Center in Beijing, said in a statement.
"The majority of [index] components have been increasing, but consumer expectations fell in April, and new export orders have been weakening for most of the previous six months."