Asian Polypropylene: The Recent Past And Immediate Future

Business, China, Company Strategy, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins

If you are interested in my take on Asian polyethylene (PE) and polypropylene (PP) prices and margins going forward 12 months, then contact me at this email address – john.richardson@icis.com. I can then provide you with details on how to subscribe to our Asia PE and PP Forecast Reports.

PPmarginspreads9August2015

By John Richardson

AS with the Asian PE market, which I discussed yesterday, you need to ask yourself this question about our region’s PP market: “Why is it that the spreads between PP raffia grade and naphtha have been so good so far this year?”

The same has, of course, also applied to PP margins. For example, average naphtha-based integrated PP margins averaged just $8/tonne in 2013. This rose to $195/tonne in 2014, but so far this year, up until 31 July, average margins have soared to no less than $499/tonne, according to ICIS Consulting.

And now let’s look at the chart at the top of the post in detail. It shows that between 2009 and 2014, spreads between PP and naphtha averaged $562/tonne. So far in 2015, up until 31 July, they have risen to $653/tonne.

I don’t want to bamboozle you with too much data, but still, it is important to also look at propane to PP margins as this is the other major global production route. In 2013, integrated propane-based PP margins averaged just $69/tonne and in 2014 they were at $175/tonne. So far this year, they have increased to no less than $336/tonne. Spreads have also risen quite dramatically.

Here are my four reasons why I think the Asian PP industry had done so extraordinarily well so far this year. These are similar to the five reasons I published yesterday for the success of the PE industry, but with some important differences.

  1. Up until late February, oil prices were in bear territory. From that point up until June, the mood in oil was mainly bullish and so converters in Asia, most importantly in China, “bought ahead” of their immediate resin needs in order to hedge against future PP price rises.
  2. This created the impression of stronger demand at a time when the Asian PP market certainly seemed tight.
  3. In PE, though, ethylene provided extra support to pricing, spreads and of course also margins. But in PP, propylene pricing has been under downward pressure because of several start-ups of propane dehydrogenation plants in China. These plants have some local downstream customers, but also have significant volumes of merchant propylene to sell.
  4. Nevertheless, an exceptional period of tightness in Asian and Middle East PP markets appears to have made up for this lack of support from propylene. At least that’s the story you hear when you talk to the market. Part of the reason for this tightness was said to be production issues at one major Middle East complex because of gas feedstock shortages.

Throughout this fantastic period for the PP industry, though, demand across Asia was described to be at best OK and quite often weak.

And throughout this fantastic first seven months of 2015, China was going gung-ho on production. Its output rose by no less than 23% year-on-year as it ran its coal-based plants exceptionally hard. Up until May, which is the latest data we have available on this, China’s self-sufficiency in PP was at 77.8%. This was 9.3% higher than January-May 2015, according to ICIS China.

One can argue that these new PP plants were pushed very hard because of a lack of imports due to the tight supply in the rest of Asia and the Middle East.

But why, if this were the case have we heard reports of China coal-based PP being exported certainly to Southeast Asia, and possibly also to Latin America? Surely, if markets in China were lacking material, then this wouldn’t have happened. I  feel that running these PP plants hard is instead strategic, as it is about creating employment in inland China where most of these plants are located. Let’s wait, though, for the production data for the rest of this year and into 2016. This might help resolve the debate.

Back to the here and now. Oil prices are now in bear-market territory as China’s also economy further weakens.  In addition, were are past the high point of this year’s Asian cfacker turnaround season, as new supply comes on-stream in the Middle East. This has led to recent falls in the PP price.

Sure, oil might bounce back on some unpredictable geopolitical crisis, but in the long term I can find no reasons why crude prices won’t continue and complete their journey back to their historic average price of $30 a barrel.

China’s economy will have to also get  worse before it gets better as the Normal further develops.

So, as with PE, there is every chance that both PP spreads and margins will return to their historic averages – and perhaps they might even fall below these averages.

When might this happen? You would be unwise not to plan for the possibility that this could occur during the rest of 2015 and into early 2016.

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