OUTLOOK ‘12: Asia olefins players brace for volatile times

By Peh Soo Hwee

SINGAPORE (ICIS)–Asian olefins producers, buyers and traders said they are bracing themselves for volatile times in 2012 because of the bearish global economy and fluctuations in upstream naphtha and crude prices.

Market players are currently in negotiations for 2012 contracts. Against the backdrop of an uncertain global economic climate, some traders that are negotiating ethylene contracts with end-users want to include a cost component into their contract formula, instead of being solely reliant on market prices, sources said.

“Traders want to link 2012 contracts with naphtha because ethylene prices have been low this year, compared with naphtha costs,” said an end-user that is currently in discussions for 2012 settlements.

However, buyers are strongly resisting including a cost component in their contracts for fear that their raw material costs will escalate next year.

In 2011, most contracts with end-users in the leading China market were based on a formula referencing a mix of FOB (free on board) Korea and CFR (cost & freight) northeast (NE) Asia prices or solely CFR NE Asia spot prices.

The break-even spread between naphtha and ethylene is typically around $250/tonne (€193/tonne) but margins have been squeezed, particularly in the second half of this year (see graph below).

Ethylene margins in northeast Asia returned to positive territory in early December, partly because of a recovery in ethylene and butadiene (BD) prices, following widespread cuts in operating rates to 80-90% capacity across Asia, according to ICIS data.

However, several market players do not foresee that cracker operators will resume full production early next year because derivative demand remains weak.

“[End-users] have already cut [their] domestic production and are minimising their purchases and decreasing [their] inventory levels. We don’t see a good first quarter next year, especially because of the gloomy economic outlook,” said an olefins trader based in Japan.

Ethylene daily spot prices are currently hovering at $1,140-1,160/tonne CFR NE Asia. Naphtha was traded at $922.25-925.25/tonne CFR Japan on Tuesday.

Several market players said they were pessimistic about the run-up to the Lunar New Year holiday in late January and expect demand to be weak prior to the festive season.

“Nobody wants to stock up before the Lunar New Year holiday,” said a Chinese propylene importer.

“It is better to have cash than to have stocks,” the importer added.

The first quarter of the year is also traditionally a lull manufacturing season for most petrochemical products.

However, some market players are more optimistic about the olefins pricing outlook after the first quarter of 2012, as they expect the impending permanent shutdown of CPC Corp’s 230,000 tonne/year No 3 cracker in Linyuan, Taiwan, in March-April next year to tighten olefins supply in the region.

CPC will scrap its No 3 cracker to make way for a new 600,000 tonne/year No 6 cracker at Linyuan that is expected to come on stream in the first quarter of 2013, market and company sources told ICIS.

CPC is expected to import ethylene supplies for derivative use and is currently in negotiations with potential sellers, said a company source who did not provide further details.

There are currently no discussions to import propylene, the source added.

In addition, some market participants expect some support for olefins pricing, particularly in the second and third quarter of the year, when the bulk of cracker turnarounds in the region will take place.

At least 17 crackers in Asia are scheduled for maintenance in 2012.

“There are several shutdowns in Japan and China during the second and third quarter,” said a Korean olefins trader.

However, the main factor that will determine how well the Asian olefins market will do next year is the demand from China, the trader added.

China is Asia’s largest spot importer of ethylene and propylene, which are used as feedstock for a wide range of petrochemicals that are eventually used to produce finished goods such as textiles, toys and consumer goods.

Ethylene imports in China are expected to grow to 965,000 tonnes in 2011, as compared with 815,000 tonnes in 2010.

Propylene imports are similarly expected to increase to around 1.55m tonnes this year, up from 1.52m tonnes in 2010, according to ICIS data.

“The key would be Chinese demand,” said the Korean trader.

($1 = €0.77)

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