OUTLOOK ’14: Asia ECH seen stable on demand-supply optimisation

Matthew Chong

07-Jan-2014

By Matthew Chong

SINGAPORE (ICIS)–Asia epichlorohydrin (ECH) market – which remained bleak in 2013 – is expected to turn to stable as excess supply would be forced out of the system with plant closures and reduced production rates, market sources said.

The Chinese import market has been subdued for most part of 2013 due to an ample availability of lower-priced domestic material.

China import prices were in a narrow range of $1,550-1,595/tonne CFR CMP for iso-tank since end-February amid an illiquid import market.  

The equivalent import parity prices of ECH in China were estimated to be at $1,464-1,590/tonne (€1,083-1,177/tonne) CFR (cost & freight) CMP (China main port), after accounting for a 17% value added tax (VAT) and 5% rebate for ECH to be used in the production of epoxy resins for export sales.

Taiwanese imports to China are exempted from the 5.5% import duties imposed on imports from most other countries.

China domestic bulk ECH prices were range-bound at yuan (CNY) 9,250-10,050/tonne ($1,528-1,662/tonne) DEL (delivered) east China from March to early December 2013, before hitting a 14-month high of CNY11,400/tonne DEL (Delivered) east China on 31 December 2013, according to ICIS data.  

The ECH market had been bleak last year because of a supply glut in the main China market on the back of relatively stable, albeit weak epoxy resins demand.

However, most Chinese ECH plants are now operating at less than half capacity.

Producers have been making losses because of high feedstock propylene prices and oversupply.

As a result, it is likely that small producers, who are not cost-efficient in the competitive and long market, would have to shut their plants.

Furthermore, these producers are less environmentally friendly in their production and are at risk of being cracked down by the Chinese government as the country steps up its effort against pollution.

Firm propylene prices also led more new plants in 2013 to be glycerine based and some propylene-based plants, such as Tianjin Chemical’s 61,000 tonne/year facility in Tianjin, China, to be converted to glycerine-based. This is because the prices of glycerine, the alternate feedstock, are more competitive.

However, even so, given the current poor market conditions, the cost advantage is not enough for the producers. Some glycerine-based plants scheduled to start in 2013/14 were consequently delayed or cancelled along with the propylene-based plants.

An example is Belgium’s Solvay, which operates the largest ECH plant in Thailand under its subsidiary Advanced Biochemical (Thailand). The company has delayed the start-up of its new 100,000 tonnes/year glycerine-based facility in Taixing, east China, until further notice.

The plant was initially scheduled to start in the second half of 2014, a company source said.  

Meanwhile, an ECH producer, Xinyue Chemical in Shandong, has converted an ECH plant to produce propylene oxide (PO) as PO is a relatively more lucrative business than ECH.

PO was trading at a 10-month high of $1,845/tonne CFR (cost & freight) CMP (China Main Port) on 20 December 2013.

Another ECH producer in Shandong, Zhonghai Fine Chemical, has plans to convert both of its 40,000 tonne/year lines to produce PO in 2014, according to market sources.

However, while it may be technically possible to convert an ECH plant to produce PO, there are other considerations.

“It remains to be seen whether the conversion from ECH to PO plants [in China] would become a trend as there are technical and environmental issues to consider as well,” a major China-based Taiwanese epoxy resins producer said.

“I heard it costs yuan (CNY) 30m [$5.0m] to convert a 80,000 tonne/year ECH facility to produce PO,” he added.

“Even with the high price of PO now, producers would have to carefully weigh up the long term prospects of PO against the huge investment required as PO supply is expected to be long this year [2014],” the same producer said.  

While the poor ECH market conditions could improve with an expected rise in demand for epoxy resins in the second half of 2014, the control of ECH supply would be the major price determinant.

Most would have expected ECH price trends to track demand for epoxy resins – the main usage of ECH, closely, but China drummed ECH domestic prices defied logic, surging by 19% to CNY11,400/tonne DEL east China on 31 December 2013 in a period of only one month when demand for epoxy resins was weak in the year-end lull.

Prices are likely to stabilise at CNY11,000-11,500/tonne, due to a lack of cheaper alternatives as major Chinese producers continue to limit supply and offer at high prices because firm feedstock propylene prices have further eroded their margins.

That said, any upside on prices is expected to be capped at current levels as downstream demand has not picked up substantially, market participants said.

The participants were sceptical whether the firm prices could be sustained in the long term as the price increases were not demand-driven, but rather a result of a few major Chinese ECH producers raising their offers because of firm feedstock propylene prices as they reduce supply.

With domestic prices on an uptrend, an improvement in demand for imports could be seen should there be further increases in the near term when Chinese buyers find import cargoes more attractive.

The competition from the import market would hence limit the room for any price hike amid weak demand.

($1 = €0.74 / $1 = CNY6.05)



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