Global Petchems Industry Must Prepare For More Difficult 2015

Business, China, Company Strategy, Economics, Oil & Gas, Olefins, Polyolefins

THE direction of Asian polyethylene markets, once again, serves as a good guide for the overall global petrochemicals industry.

Producers in every region and in every sector of our industry should, therefore, take note of what follows. They must prepare for what we worry will be a much more challenging 2015.

 

By John Richardson

ASIAN polyethylene (PE) margins looked very good for the week ending 12 September.

Northeast Asian integrated low-density polyethylene (LDPE) margins were, for example at their highest level since the first week of 2014, according to the weekly ICIS Pricing PE Margin Report.

And in the case of high-density PE (HDPE), variable cost margins, when you factor in the resilient strength of ethylene and all the co-product credits, were even better: The same 12 September report estimated that they were at their highest level since June 2012.

Average August Northeast HDPE margins were also at their best level since July 2012 (see the chart below):

PEmargins19September

Why? Because:

  • Ethylene is firm on continued strength in the Asian spot market. This is due to production issues at both Northeast and Southeast Asian crackers that are lasting longer than expected and lack of imports from other regions, as arbitrage is closed. The tight supply is not expected to significantly ease until October.
  • Asia’s naphtha market is also expected to remain bearish until November, in response to the weaker demand caused by all the cracker shutdowns. Further downward pressure on prices has been exerted by reports that 1.5m tonnes of cargoes will arrive in Asia from the West in October.
  • And, of course, naphtha has got cheaper because of cheaper oil. Crude prices have declined on increasing supply from the US, a reluctance by OPEC to cut production and weaker economic growth, especially in China.

The irony is that because on an integrated basis, Asia’s cracker operators are doing pretty well at the moment, they might hold back on the PE production cutbacks needed to improve the market.

What is a better guide to the problems facing the PE sector is this: Average non-integrated HDPE margins in Northeast Asia were last week at their lowest average level in August since way back in September 2004.

Sales volumes in the key China market will be weaker in the second half compared with H1.

Here is why:

  • Credit growth has been lower in China throughout this year. This one of the most important measures of the extent of the economic slowdown.
  • And yet China’s domestic PE production increased by 10% in January-August 2014 compared with the same period last year, according to ICIS data.
  • Imports were also up by 15% in January-July of this year over the same seven months in 2013.
  • Real PE demand growth in China is expected to be no more than 6-7%, after adjustments for inventory distortions.
  • So all this extra PE might well be sitting in inventories somewhere.
  • The fourth quarter  often sees a seasonal slowdown in demand, after China’s peak manufacturing season comes to an end.
  • And all the signs are that this year’s peak manufacturing season will be a disappointment.
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