OUTLOOK ’16: Asia C2 supply to stay tight on Japan cracker closure

Author: Yeow Pei Lin

2015/12/31

Asia ethylene supply likely to stay tightSINGAPORE (ICIS)--Northeast Asian ethylene (C2) supplies are expected to remain tight in 2016 as capacity losses owing to a cracker closure in Japan are unlikely to be adequately counterbalanced by a lighter cracker turnaround schedule, market players said.

Southeast Asian end-users will likely rely more heavily on arbitrage cargoes from Europe as exports from the Middle East may stay at reduced levels next year and due to a prolonged shutdown at Shell’s cracker in Singapore, they said.

Exports from Japan are expected to fall from the current year’s levels, with a number of producers affected by the ongoing rationalisation of the country’s petrochemical industry.

Slightly over 1m tonnes of ethylene production will be lost in 2016 as a result of cracker turnarounds in Asia, with the shutdowns concentrated mainly in northeast Asia, according to ICIS data. This is around half the maintenance-related output losses of 2.17m tonnes in 2015.

But Japan’s ethylene production will be down sharply when Asahi Kasei Chemicals shuts its 500,000 tonne/year cracker in Mizushima permanently in February 2016, less than a year after Sumitomo Chemical closed its 415,000 tonne/year unit.

Asahi Kasei will merge its cracker operations with Mitsubishi Chemical under Asahi Kasei Mitsubishi Chemical Ethylene Corporation. The 50:50 joint venture will operate Mitsubishi Chemical’s 570,000 tonne/year cracker from 1 April 2016.

Asahi Kasei’s cracker closure will begin to impact Japan’s ethylene supply-demand balance from April onwards after the producer completes its first-quarter downstream plant turnarounds, Japanese sources said.

Both Asahi Kasei and Mitsubishi, which are currently in a relatively balanced position, will become net buyers. They are in the process of sourcing domestic supply for delivery from the second quarter of 2016 and this has impacted the quantity of cargoes offered by other Japanese producers for export under their 2016 term contracts.

Separately, a key Japanese supplier Maruzen Petrochemical plans to reduce its exports following a reduction in its share of product allocation in Keiyo Ethylene this year and ahead of scheduled maintenance at its 520,000 tonne/year cracker in Chiba in mid-2016.

Supplies from South Korea – another major export market – will likely continue to contract in 2016 on higher domestic consumption.

Korean end-users are seeking additional domestic quantities to offset the expected fall in Japan’s exports, and to operate their plants that started up in the second half of 2015. The downstream plants include Hyosung Corp’s 50,000 tonne/year polyketone plant and Kumho Polychem’s 60,000 tonne/year ethylene propylene diene monomer (EPDM) unit. Key ethylene exporter Yeochun NCC’s (YNCC) also started up a 140,000 tonne/year olefins conversion unit (OCU).

Korea’s ethylene exports dropped by 32.4% year on year to 757,074 tonnes in 2014, with the total shipments in 2015 likely to decline further below 600,000 tonnes due to a series of turnarounds at major crackers, according to Korean sources.

Term export volumes offered by some northeast Asian producers have declined by up to 50-70% from the current year’s levels, sources said.

“The quantity offered by a few suppliers is pitiful. We are trying to get them to increase the supply," a trader said.

With the resources in the two major export markets becoming more limited, the operators of stand-alone downstream projects slated to start up in end-2015 and 2016 in China and Taiwan will likely face difficulty in securing competitively-priced feedstock.

Some of the new facilities that will be reliant on import cargoes include Qingdao Haijing’s 1.1m tonne/year vinyls complex in China and USI Corp’s two 75,000 tonne/year ethylene vinyl acetate (EVA)/low density polyethylene (LDPE) plants in Taiwan.

In southeast Asia, consumers will likely lean more heavily on supplies from Europe on expectations of continued weak exports from the Middle East and given the uncertain restart schedule of Shell’s 960,000 tonne/year cracker in Singapore.

End-users and traders said shipments from Saudi Arabia and the UAE will be constrained by cracker turnarounds, insufficient feedstock ethane and healthy domestic demand.

“Our term supplier has not given any indications on the quantities available for export. It is already coming to the end of the year. There is probably not going to be anything renewed," a buyer said.

The uncertain production situation in Singapore added to the supply woes.

A Mideast producer had relied on a producer in Singapore to fulfil a substantial quantity of its 2015 term commitment to end-users, but cargo availability in Singapore is unclear next year following Shell’s cracker outage in late November. Sources said the facility on Palau Bukom may remain shut for up to four to six months.

The tighter balance in Asia will offer an opportunity for producers in the US Gulf and Europe to increase their exports.

A regional trader has made an agreement with a European producer for at least 250,000-300,000 tonnes of ethylene supply in 2016, with most supply likely to head to southeast Asia, market sources said.

There will likely be a steady flow of cargoes from the Americas as well, particularly in the US, where producers enjoy the advantage of low-cost feedstock. The bulk of the US cargoes will head to northeast Asia, they said.

Meanwhile, many end-users are bracing themselves for a tough year because of the weak Chinese economic outlook and amid expectations of firm feedstock ethylene costs.

A number of Chinese buyers expect to operate their plants at reduced rates in 2016 and this, coupled with deep-sea supplies, may help to moderate the impact of the tight regional supply on prices.

“We will not lock in too much high-cost term supply. We need to have the option to cut operations when our margins are poor," a Chinese end-user said.

Other end-users are hoping that producers with integrated operations will opt to reduce the underperforming downstream units and offer ethylene for export.

“Look at [how] bad the MEG [monoethylene glycol] market is now. If this continues, more producers will be selling ethylene," a buyer said.

By Yeow Pei Lin

ICIS Dashboard NE/SE Asia Ethylene Price History 2015