OUTLOOK ’18: Asia PP braces for long supply; sellers seek new markets

SINGAPORE (ICIS)–Polypropylene (PP) sellers are turning to southeast Asia in search of alternative markets to China, where growing domestic capacities are expected to lead to a slowdown in imports in the long run.

The PP market in southeast Asia begun the year balanced to short, with spot prices receiving a boost from firmer import prices in China.

Traders in the region were quick to take advantage of an open arbitrage window in late February to divert available allocations from China to southeast Asia, when the spread between import prices in the two regions trended wide.

However, supply lengthened; especially in China, where inventory levels build up in the wake of the Lunar New Year holidays, setting a bearish tone for most Q2 2017 in the rest of Asia.

As a result, spot prices in southeast Asia began a gradual decline, bottoming out for the year in June at $1,060/tonne CFR (cost and freight) SE (southeast) Asia on average for all-origin PP flat yarn cargoes, according to ICIS data.

Spot prices rebounded in Q3 2017, surging to yearly highs of $1,200/tonne CFR SE Asia for all-origin PP flat yarn cargoes in late September, buoyed by tight supply levels amid global outages at production plants in Asia and the US.

Q1 2018 demand in southeast Asia is likely to remain slow in early in the quarter, amid expectations of softer import prices in China in the lead-up to the Lunar New Year holidays celebrated in mid-February.

Q2 usually marks a period of strong PP sales, with participants looking to restock inventories after the holiday period.

The seasonal peak for PP demand in southeast Asia is expected to start in late March or early April, before buying appetite tapers down during the Muslim fasting month of Ramadan beginning in mid-May.

Vietnam and Indonesia, the two biggest importers of PP resins in southeast Asia, are expected to continue to drive the bulk of demand in the region.

However, southeast Asia has been plagued by weaker than expected regional demand for most of 2017, and some market players were wary that this could continue in the new year.

“Demand for polymer resins in 2017 has been underwhelming. It becomes especially evident during periods which are typically seasonal peaks for the sector, because sales still remain below expectations. Many are worried that this will play out again in 2018,” a trader based in Indonesia said.

On the supply front, southeast Asian countries such as Thailand, Singapore and the Philippines are expected to continue to be major exporters of PP resins in the region.

Vietnam is set to join the ranks of a noteworthy PP exporters in 2018, with Nghi Son Refinery & Petrochemicals scheduled to start up its 400,000 tonne/year production unit in the first quarter of the year.

However, the country will remain a net importer, with domestic demand continuing to outstrip local productions.

Lotte Chemical Titan in Malaysia also has plans to expand its PP production capacity at its plant in Pasir Gudang by 200,000 tonnes/year in 2018.

The move is expected to shift the country from being a net importer to a position of net exporter, and export volumes from the country are likely to rise year-on-year.

Expansions in China will likely continue to diminish reliance on imports as the country inches toward attaining self-sufficiency in PP production.

To tackle China’s expected decline import consumption, sellers are turning to markets in southeast Asia to absorb excess supply.

Chinese suppliers will also seek to establish footholds in southeast Asian countries that it, thus far, does not have much presence in, including Indonesia, Thailand and Malaysia.

However, this is not without its challenges, as some buyers in these countries remain resistant to Chinese coal-to-olefins (CTO) or MTO (methanol-to-olefins) materials. The lack of information transparency in some southeast Asian countries is also expected to impede PP trade with China.

“Many Chinese suppliers are still unfamiliar with business customs in some southeast Asian countries, and it will take some time to iron out teething issues,” a Chinese trader said.

Chinese producers will also be seeking to defend and gain market share in neighbouring Vietnam, a major existing importer of Chinese PP materials.

Apart from Vietnam, market players were also upbeat on the plastics industry growth prospects of the relatively un-tapped markets of Cambodia, Laos and Myanmar.

Rising consumer spending in these countries could propel downstream demand for household appliances and food packaging, and many suppliers are looking to push toward expanding their presence in these markets.

Overall, the PP market in southeast Asia will continue to hinge on sentiment in China and any significant upstream crude oil price movements.

Outlook article by Leanne Tan