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Supply Exceptionally Tight, But Real Demand Still Struggles

Business, China, Company Strategy, Economics, Indonesia, Malaysia, Thailand
By John Richardson on 11-Jun-2015


By John Richardson

WHAT a fantastic year it has so far been for margins, with the chart above showing how in one grade of polyethylene (PE), Northeast Asia (NEA) and European producers are really, really cashing in. The same applies across many others grades of both PE and polypropylene (PP).

In Northeast Asia, one of the reasons for this might well be widespread, but unconfirmed, reports of gas-supply issues in the Middle East. PE and PP operating rates in two particular countries are reported to have been severely curtailed because of problems with feedstock availability.

We are also in the middle of a cracker turnaround in Asia in general. We estimate that 13% of Asian cracker capacity was lost to production issues in May, which will be the peak for this year. We expect this percentage to fall to 7% in June.

Tight polyolefins supply and rising oil prices have led to the expectation that PE and PP prices will keep on increasing. This has resulted in plastic converters “buying ahead” of their immediate manufacturing needs, as always happens at times like this.

As for Europe:

“In my thirty years in the polymer industry I have never seen anything like this,” said one large buyer. This sentiment has been echoed many times.

What lies above is from this excellent Insight article by my colleague, Linda Naylor,

Low prices, particularly in dollar terms as the euro has weakened against that currency, have left imports unworkable, but export opportunities strong, she added.

The imposition of an increased import duty on Gulf Cooperation Council product, from 3% to 6.5% on 1 January 2015, has also affected imports, said Linda.

And she added that in Europe, demand was poor as oil prices fell, but then rebounded in March as crude recovered.

Perhaps most importantly of all, though, PE and PP pricing in Europe has strengthened because of production issues. The region has seen a huge volume of outages, even by European standards. Supply has been further tightened by the permanent closure of some plants due to competitiveness issues.

But what about real, sustainable demand?

In Asia, we know that the key China market continues to slow down. Affordability of imported polyolefins has thus become a big issue for local plastic processors, resulting in widening price gaps between imported and domestic resins. The ability of local converters to afford PE and PP can only get worse as China’s radical, but essential, economic reforms continue.

Across the rest of Asia, demand is described as “OK, but hardly spectacular” because of macro-economic problems. For example, Indonesia, Malaysia and Thailand are struggling with falling consumer spending, weak wage growth and political uncertainties.

What about Europe? The most immediate threat  might turn out to be the “slow motion Greek train wreck”.

This is all connected, of course, as it is part of the Great Unwinding that I first start discussing early last year.

What of the second half of the year then? Because these are mainly supply-driven margins, rather than margins driven by sustainable, long-term demand, we should prepare for:

  1. More and more pushback from plastic processors in Asia and Europe as affordability issuesy worsen.
  2. As the Great Unwinding continues, a decline in oil prices,  just as polyolefin supply increases on the end scheduled and unscheduled shutdowns.

An important longer-term lesson from this year’s fantastic margins is that reports of the death of naphtha cracking have been greatly exaggerated.

Why would any further European cracker operators want to shut down, given that, as we are in a period of exceptional economic volatility, these strong margins might be repeated? Europe has also worked hard on improving its long-term competitiveness.

Similarly, why would NEA cracker operators want to push-ahead with any further restructuring?

What does mean for longer-term supply and demand balances as large volumes of new US PE capacity hit the market? I think, by now, everyone should know the answer to this last question.