By John Richardson
ASIAN ethylene and polyethylene (PE) margins both fell last week – a further indication that the Chinese market remains weak.
Bonded warehouses are still full of PE as a result of high imports in March at a time when local production was being ramped up, the blog was told this morning.
But nobody seems clear about the outlook for final end-user demand in an increasingly uncertain domestic and global economic climate, which is being reflected in highly volatile crude-oil prices.
This has led to some converters reverting to the hand-to-mouth buying patterns that occurred immediately after the start of the economic crisis in September 2008, we have been told.
A further factor behind the negative buying climate is the imminent start-up of more capacity and, as we reported last week, success relative to the Middle East by China in stabilising new production.
Sinopec’s priority also appears to be in keeping the new plants running at or close to 100%, even if this means weakening Yuan-based pricing.
Naphtha-based Northeast Asian (NEA) ethylene margins fell by $50/tonne for the week ending July 9, according to the ICIS pricing Weekly Asian Ethylene Margin Report. This was the result of an $8/tonne in naphtha costs and a $20/tonne fall in C2 prices (see separate article below).
NEA margins averaged $474/tonne in Q1, $378/tonne in the second quarter and only $222/tonne so far in Q3.
Linear low-density PE (LDPE) and high density PE (HDPE) margins for integrated producers in NEA (i.e. those with captive ethylene supply) were also down for the week ending 9 July, according to the ICIS pricing Weekly Asian PE Margin Report.
LDPE margins fell by $60/tonne and HDPE by $65/tonne on weaker PE pricing and a rise in naphtha costs. LDPE film-grade prices had slipped by $30/tonne and HDPE film by $20/tonne in the China CFR market.
HDPE injection grade NEA margins averaged $398/tonne in the first quarter, $357/tonne in Q2 and $305/tonne so far in Q3.
“There is no storage space available in any of the bonded warehouses in southern or eastern China,” said a Shanghai-based polyolefins trader.
But he added that there were contradictory reports of high or only medium storage levels in the domestic warehouses that store resin priced in Yuan.
“I don’t think inventory levels actually matter that much. There is such uncertainty about the outlook that we are seeing some converters managing inventory the way they did in late 2008,” said a Southeast Asian polyolefins sales manager.
“In other words, purchasing is hand-to-mouth with a great reluctance to buy anything more than minimum quantities because of oil-price volatility.”
Another factor behind the reluctance of buyers is signs of weakening growth in the Chinese economy. For example, on a month-on-basis basis auto sales slipped in June with a senior government official warning last week that property prices were heading for a significant correction.
Further new supply just around the corner includes the 540,000 tonne/year Borouge 2 LLDPE plant. Production at the 1.5m tonne/year cracker which will feed the PE plant was due to be stabilised by the second week of July, ICIS news had reported.
It is easy to paint a very gloomy outlook for the PE market – and it seems likely that some of the problems we’ve dealt with above apply to other chemicals and polymer markets.
We will endeavour to look at these other markets over the next few weeks.
Several Factors Behind Ethylene Price Weakness
The fall in ethylene prices to $850-900/tonne FOB Korea occurred despite an outage at the Formosa Petrochemical Corp 700,000 tonne/year No 1 cracker, which is set to last 2-3 months.
But Formosa already had high C2 inventory levels built-up ahead of a turnaround at its 1.03m tonne/year No 2 cracker, according to ICIS pricing.
Asian spot ethylene markets have also lengthened this year on the start-up of the Shell Chemicals’ 800,000 tonne/year cracker in Singapore.
Saudi Arabia has also reportedly increased ethylene exports in the last few weeks on lower PE operating rates due to the weak Chinese demand and an outage at a PE plant.
Cargoes are also being lifted from Abu Dhabi, where Borouge is in the process of commissioning its new 1.5m tonne/year cracker and associated downstream plants.
It is therefore to very hard to work out to what extent this latest ethylene price decline (four weeks ago pricing was at $900-650/tonne FOB Korea) is the result of weak demand versus these other factors.