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
Global polyethylene in 2020: Margins will reach historic lows as new growth model emerges
08/12/2019

Here is a first of a series of outlook articles for 2020 where I focus on the risks ahead for the gl...

Read
Long term downcycle will transform global petrochemicals, creating new Winners and Losers
06/12/2019

By John Richardson THIS IS not a normal downcycle. Please get over that idea however many people, bo...

Read
Asian PE and PP margins at lowest levels in at least five years and will go lower……
04/12/2019

By John Richardson NOT since at least the beginning of 2014 have Northeast and Southeast Asian polye...

Read
Asian polypropylene market heads for major 2020 downturn
02/12/2019

By John Richardson THE ASIAN polypropylene (PP) market hasn’t been as bad as the region’s polyet...

Read
China new vehicle sales: A long term decline and what this means for petrochemicals
29/11/2019

By John Richardson THE MAINSTREAM view is that there is nothing fundamental about the decline in new...

Read
Asian copolymer polyproplyene used as a sink for growing oversupply of ethylene
27/11/2019

By John Richardson A SURE sign that the Asian ethylene-to-polyethylene (PE) markets are distressed c...

Read
Asian polyethylene shutdowns? Once again, good luck with that idea
25/11/2019

By John Richardson I was new to the game as I had only been analysing the petrochemicals business fo...

Read
Europe to become much more self-sufficient in polyethylene because of sustainability
20/11/2019

Yes, I know I promised to focus on Asia and its cracker-to-PE industry today and how the region will...

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