By John Richardson
JUST about every Asian cracker operator is losing money right now, according to a polyolefin industry source.
And the above chart indicates that margins are wafer-thin in Northeast Asia because of the unexpected weakness in the China market, where polyethylene (PE) demand growth is forecast to either be flat or in negative territory during 2013.
“The South Koreans are still running at 87-90%. And now we are about to enter the peak production season in Asia and they will raise rates to 90-92%,” added the source.
“This 5-7% capacity increase will need a 5-10% pick-up in demand to be absorbed. This is not going to happen and so Q2 will be a disaster for smaller players.”
Plus, ExxonMobil is widely expected to raise output at its two 650,000 tonnes/year metallocene linear-low density PE (LLDPE) plants in Singapore.
But it is not all doom and gloom, insists a second polyolefin industry source.
“The state of demand really depends on what application you are talking about,” he said.
“For example, diaper film and food packaging applications are going extremely well, but the garbage bag sector in China is still undergoing consolidation as converters in the higher labour cost coastal provinces relocate to countries such as Vietnam.
“The really smart converters are those who have focused on internal Asian markets where demand is unaffected by the problems in the West. They are doing well and are still buying good volumes. It’s the less clever processors which are really struggling and are, thus, buying resin on hand-to-mouth basis.
“There are still a lot of people in Asia who are the first time shopping in supermarkets as lifestyles change, and so there is still plenty of room for growth in low-value packaging applications in, for instance, inland China, away from the developed coastal provinces and in many parts of Indonesia.
“A lot of the family-owned converters are going through a transition period, as sons and daughters take over. These sons and daughters have often been to top business schools in the West and so are making the right investment decisions.”
But still, the overall margin picture in Asia gives the impression that the number of downstream customers struggling in a weak demand environment exceeds the quantity of “smart converters”.