Asia epoxy resins trade flow to Europe may reverse on euro fall

Focus article by Matthew Chong

SINGAPORE (ICIS)–Asia’s liquid epoxy resins (LER) market is being weighed down by weak demand from Europe, and there is a possibility that trade flows between the two regions will reverse if the euro continued to depreciate, industry sources said on Thursday.

Europe is a major epoxy resins market for South Korea, which accounted for more than 10% of the continent’s total imports of the material in 2012 although actual volumes have declined from two years ago.

The euro fell to an 11-year low on 23 January after the European Central Bank (ECB) announced a plan to inject a hefty stimulus worth €1,100bn to rev up the eurozone economy.

A weak currency makes imports of dollar-denominated commodities more costly but makes exports competitive.

“If the euro were to keep falling, we may even start seeing European cargoes flowing the other way into Asia, said a source from a South Korean producer.

“I think it is possible that the euro may even fall to be [at] parity with the US dollar,” the source said.

The EU has also been exporting epoxy resins to South Korea, but at much lower volumes compared with imports. In 2012, the EU shipped out 4,599 tonnes of LER to South Korea, up from 3,572 tonnes in 2010.

A free trade agreement (FTA) has been in effect between the EU and South Korea since 2011, while a 6.5% import duty applies to EU imports from most other northeast Asian producers, including China and Taiwan.

Despite continued weakness in the demand, LER prices in Asia may have hit bottom on the back of rebounding values of feedstock bisphenol A (BPA), as well as those of raw material epichlorohydrin (ECH) in China, industry sources said.

On 27 January, LER prices in Asia were assessed stable at $2,200-2,400/tonne FOB (free on board) NE (northeast) Asia, halting five straight weeks of declines since first-half December 2014, according to ICIS pricing data.

Any price increase, however, is likely to be contained in view of lacklustre demand, with European buying interest in Asian cargoes particularly weak amid the sharp depreciation of the euro against the US dollar, market participants said.

“European customers are asking for lower prices as it is now more expensive for them to purchase in US dollars,” a source from a South Korean producer said.

European prices have been hovering above Asian prices over the past few months as Asian prices declined in tandem with upstream values, while European prices have remained largely stable throughout most of 2014.

For January contracts, prices were at €2,480-2,595/tonne FD (free delivered) NWE (northwest Europe), according to ICIS data.

A Taiwanese producer said that European prices are unlikely to fall too much as raw material procured on US dollar-basis would largely balance out the price advantage the Europeans have over Asian producers.

“The euro situation now is similar to the [Japanese] yen. Japan’s (domestic) prices did not really fall by much when the currency devalued,” the producer said.

First-quarter Japanese domestic LER prices have been concluded at $2,600-2,700/tonne DEL (delivered) Japan, similar to import prices on a delivered basis, a Japanese producer said.

The prices in yen terms are largely unchanged from the previous quarter as lower costs of raw material prices were offset by the devaluation of the currency.

“Buyers are expected to lobby strongly for lower prices in the second quarter to reflect the overall declining prices of LER in Asia,” the Japanese producer said.

The Middle East may also see an increase of competitively-priced epoxy resins shipments from Europe because of the weakening euro, industry sources said.

Spot offers on a cost-insurance-and-freight (CIF) Middle East basis for Europe-origin cargoes are now similar to northeast Asia-origin material, according to a Middle Eastern buyer.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections