Southeast Asia PE spreads further underline weak demand, but trade talks promise rebound

Business, China, Company Strategy, Economics, Indonesia, Malaysia, Naphtha & other feedstocks, Oil & Gas, Olefins, Philippines, Polyolefins, Singapore, Thailand

By John Richardson

THE GOOD news today is that the US and China have agreed to resume trade talks. Presidents Trump and Xi are also scheduled to meet at the G20 meeting in Osaka, Japan, on Saturday – 29 June – to discuss the trade dispute.

If a trade deal is done, or at the very least President Trump agrees to halt imposition of further tariffs on China, then polyethylene (PE) spreads over naphtha could well rise. Improved confidence is likely to encourage buyers to acquire more resins.

This will confirm my argument that the current malaise in markets has little to do with new capacity coming on-stream. This year’s new supply has been known about for a long time. What is instead the problem is demand. But because demand is so difficult to quantify, market participants are talking about supply as they still need something to talk about.

How do we know that demand is the problem when demand is so difficult to estimate? The old-fashioned approach of studying spreads, relative costs of naphtha operating rates give us the answer.

Southeast Asian (SEA) PE spreads over naphtha are at their lowest level since 2012, as is also the case with China PE spreads over naphtha.

But this is not in keeping with our estimate for SEA PE operating rates of 86% in 2019 – quite healthy. We compiled this estimate at the end of last year and since then new supply hasn’t arrived quicker than we had expected. In fact, instead, the start-up of one major new complex – PETRONAS’S RAPID – has been delayed.

2019 spreads tell us that if things continue as they are, our 2019 operating-rate estimate will be wrong because we have overestimated demand:

  • This year’s spreads are at $522/tonne when naphtha is only costing $534/tonne CFR Japan.
  • But in 2013, naphtha was at a very high $923/tonne CFR Japan and yet spreads were at a resilient $567/tonne. This indicated that during that year, PE producers had much more pricing power than today. And yet in 2013, actual operating rates were only at 85%.

Also consider this:  Spread analysis needs to be conducted along with improved political analysis. In this new era of anti-globalisation, politics are playing a major role in shaping demand.

PREVIOUS POST

Global polyethylene: Supply is not the problem, it is demand

24/06/2019

By John Richardson WHEN people talk about supply it is very often because it is ...

Learn more
NEXT POST

US LLDPE imports and the impact on European petrochemicals

26/06/2019

  By John Richardson EUROPEAN linear-low density polyethylene (LLDPE) marke...

Learn more
More posts
After COVID-19: How US petrochemicals could become the laggard
08/04/2020

The big oil, gas and petrochemicals companies have already started planning for how the world will l...

Read
Focus of petchems business must be on meeting medical and food needs
05/04/2020

By John Richardson SEVERAL contacts have said to me over the last two weeks that increased medical a...

Read
Be very, very cautious about buying into the idea of a Q2 crude price rally
03/04/2020

By John Richardson IT IS the unprecedented nature of the demand shock that’s the thing, regardless...

Read
No business as usual despite re-ordering of global polyethylene competitiveness
01/04/2020

By John Richardson THERE ARE sadly no business as usual scenarios, in my view. Under normal circumst...

Read
China: temper your expectations of a H2 recovery for supply as well as demand reasons
29/03/2020

By John Richardson CHINA IS gradually getting back to work, but only gradually because the governmen...

Read
Petrochemical feedstock purchasing managers: What to think about and what do next
27/03/2020

By John Richardson ALL THE old assumptions about how oil, feedstock and petrochemicals markets work ...

Read
Vital work to maintain petrochemicals supply for essential services must continue
26/03/2020

By John Richardson INDUSTRY associations around the world are lobbying governments about the importa...

Read
Polyethylene: How to plan sensibly as we face threat of new Global Depression
25/03/2020

By John Richardson I SINCERELY want to help you guys. That’s what I am here for. To this end, here...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more