Tanks are full to bursting in China amid demand slump

After China’s Spring Festival, domestic inventories of some of the major petrochemicals continued to break historical highs, and the market as a whole operated with high inventory and low prices.

Now, traders may be looking for an upturn, but due to the slow recovery of demand, the foundations for price increases remain fragile.

Inventories are high for a range of petrochemicals, including ethylene glycol (EG), styrene, pure benzene, acetone, toluene, xylenes, methanol, acetic acid, polyolefins and more. According to ICIS inventory data, ethylene glycol, styrene, pure benzene, acetone and xylenes are typical products with high inventories.

Weekly inventories by mid-March were far above the corresponding periods in 2017 and 2018. Products such as styrene and acetone were over 100% higher year on year.

It is not rare for petrochemicals stocks to build in the first quarter of each year, given the impact from the Spring Festival break and the Lunar New Year celebrations. However, this year’s highs seem exceptional.

Mainstream tank storage for many products has reached the limit of capacity. Spare, smaller tanks that are usually left unused, are being activated.

Taking EG as an example, main storage areas such as Zhangjiagang Changjiang International, Changjiang Petroleum, and Ningbo, have all reached bursting point.

Recently, cargoes have found their way to smaller storage locations that usually are usually not widely used such as Haotian, Qianhong and DongLian.

Some market participants also said that although there is money to be made from imports, shipments have been blocked due to insufficient storage capacity. Against the backdrop of high inventories, prices have remained relatively low, with little prospect of an upturn. Price rebounds from short-term purchases haven’t lasted long.

Prices were generally low up to mid-March, compared with similar periods in 2018 and 2017, a situation directly related to pressure from high inventories.

The charts show the relatively higher inventory levels in 2019, positions that relate directly to lower prices.

IMPORTS HIGH IN 2018, DEMAND PULL WEAK

There are some common reasons behind the high inventory levels after the Lunar New Year holiday. For instance, from November 2018 arbitrage opportunities led to expanding import volumes.

Stocks of acetone, styrene, benzene and ethylene glycol rose in the fourth quarter of 2018 and, except for a short downturn in acetone, the other products saw steadily climbing inventories from January.

The fourth quarter is a typically a low season for demand, but the data show inventory building and sagging demand after the holiday period as well. Some pure benzene traders said that continuing sluggish prices after the holiday weakened their willingness to sell.

On the supply side, operating rates have stabilised since the end of February and, although planned maintenance shutdowns started in March, this has led to limited production losses.

Maintenance tends to take place between March and the end of the second quarter, and usually coincides with a gradual recovery in downstream demand, which in turn facilitates strong market sentiment for price increases. This year, however, demand recovery has been weak.

Some downstream buyers of acetone, for instance, have said that they had built plentiful stocks before the Lunar New Year, adding that intermittent buying after the holiday period has meant they have sufficient product supply. Their next big purchases could be postponed to April or May, they added.

Imports have put great pressure on China’s polyolefins market and price recovery has been slow and tortuous.

Macro data for January and February indicate that the economic environment is cautious to pessimistic as indicators point to slower economic growth.

Although sources have pointed to a potential relaxation of monetary policy in China, this has not occurred yet and long-term policies have focused on stimulating consumption and easing pressures on corporations. These actions have a limited effect on the petrochemicals market in the short term.

On 15 March, the state announced a three-percentage point reduction in value added tax (VAT) on manufacturing industries, effective 1 April, pushing commodities futures up slightly. However, spot prices for major petrochemicals kept fluctuating, leaning downwards.

Some market participants said the overall impact of the VAT adjustment would not be as great as expected. It is difficult to make rapid adjustments to procurement cycle as policies change, but a stimulating effect on demand might be expected over time. ■

Additional reporting by Cindy Qiu, Tina Zhang, Veronica Zhang, Yoyo Liu, Lucy Shuai, and Ran Cheng