INSIGHT: SE Asia PP braces for bumpy second half as new capacities lie ahead

Author: Leanne Tan

2019/04/23

SINGAPORE (ICIS)--Southeast (SE) Asia’s polypropylene (PP) market looks set to embark on a bumpy second half of 2019 as new capacities begin creeping in from regional start-ups.

Spot PP flat yarn grade prices regained some ground late in the first quarter of 2019, after plummeting to yearly lows in December 2018.

A flood of cargoes from India descended on the Chinese market late in 2018 as producers there sought to clear built-up inventories.

The SE Asia market was not spared, and spot prices came under pressure, with all-origins PP flat yarn spot prices bottoming out at $1,095/tonne CFR (cost and freight) SE Asia in January 2019, according to ICIS data.

Spot prices rebounded in the second half of the first quarter of 2019, but not evenly.

By mid-April, dutiable PP flat yarn prices had firmed by 6.1% from the start of the year. By contrast, non-dutiable PP flat yarn prices increased by a more modest 3.2%.


This boils down to differing supply fundamentals across Asia.

LENGTHENING SUPPLY WITH NEW START-UPS IN SE ASIA
In mid-2018, SE Asia had to grapple with the start-up of Vietnam’s Nghi Son Refinery and Petrochemical (NSRP) 400,000 tonne/year plant.

PP exports from Vietnam to China have already begun creeping up as a result.

The 200,000 tonnes/year expansion of Lotte Chemical Titan’s production capacity in Malaysia lengthened regional supply further.

And, just as trade flows have somewhat adjusted to the new volumes, even more regional expansions are on the horizon.

All eyes will be on the start-up of the Refinery and Petrochemical Integrated Development (RAPID) mega project in Malaysia’s southern state of Johor, a 50:50 joint venture between Saudi Aramco and PETRONAS.

The start-up of the venture’s massive 900,000 tonnes/year PP production unit represents a watershed moment for the regional market. It is expected to nudge Malaysia into a position of a net exporter with a total production capacity of 1.54m tonnes/year by 2020.

Other downstream plants include a 350,000 tonne/year linear low density polyethylene (LLDPE) unit, which is also capable of producing metallocene LLDPE (MLLDPE) grades; and a 400,000 tonne/year high density PE (HDPE) plant.

Trials were initially scheduled to begin in March, but were delayed. Sources close to the company say that polyolefin cargoes could begin finding their way to the market only in late April or early May at the earliest.

However, a fire that broke out at the Pengerang Integrated Complex (PIC) threatens to delay the start-up date even further, though no official statement from the company regarding its polyolefin production progress has been released.

Full commercial production is only expected in the third quarter of 2019 at the earliest.

As Malaysia currently remains a net importer for PP, fresh production from RAPID is likely to be aimed at domestic buyers first, plugging any gaps in local demand before venturing out to the export market.

Malaysian suppliers are likely to take full advantage of regional free trade agreements (FTAs) and export some cargoes to buyers in SE Asia at duty-exempted rates. Some volumes are expected to make their way to China as well.

DUTIABLE AND NON-DUTIABLE PRICE SPREAD NARROWS
There is more to the narrative than just lengthening supply.

Apart from expansions in China, most of the new capacities coming on stream are confined to SE Asia and South Korea.

Another 1.5m tonnes/year of PP capacity from South Korean-headquartered producers is expected to come on stream by 2021.

Producer Location Up-coming capacities (‘000 tonnes/year) Start-up (estimated)
Hyosung Vietnam 400 2020
Lotte South Korea 400 2021
Hanwha Total South Korea 300 2022
Polymirae and SK South Korea 400 2021

Exports from the country have been steadily increasing over the course of 2018 and this is a trend that is likely to continue in the near future.

In SE Asia, both ASEAN (Association of Southeast Asian Nations) exports and a portion of South Korea origin material enjoy duty-exempt status due to existing FTAs. Consequently, producer of duty-exempt volumes are likely to continue to tap into SE Asian demand.

Operating rates in southeast Asia are expected to remain relatively high, as margins for non-integrated producers have been persistently positive, unlike those for polyethylene (PE).


This begs the question: what does this mean for prices in the region?

We are looking at a lengthening supply of duty-free SE Asian PP material, against a backdrop of fairly static expansions in the Middle East, the main exporter of dutiable cargoes.

Most imports of non-ASEAN origins are subject to import duties ranging from 5-10%, including cargoes from the Middle East and India.

While there are some looming start-ups in India, the bulk of these volumes are likely to be aimed at plugging existing gaps in domestic demand.

With such skewed supply fundamentals, spreads between dutiable and non-dutiable PP prices in SE Asia will gradually narrow, and we have already begun to see signs of this playing out.

In 2017, the spread between dutiable and non-dutiable PP flat yarn prices stood at roughly $56/tonne on average.  By 2018, this spread had narrowed to an average of $37.5/tonne for the year.

On 12 April 2019, the difference between non-dutiable and non-dutiable PP flat yarn prices hit an all-time low of $15/tonne. This is the narrowest spread registered since ICIS first introduced the dutiable and non-dutiable PP flat yarn grade price assessments back in 27 Aug 2010.

Despite non-dutiable prices coming under pressure, some buyers of dutiable Middle East cargoes have opted not to make the swap.

In Indonesia and many other SE Asian countries, converters and end-users who re-export their downstream finished products are eligible to apply for exemption from import duties for their PP raw material purchases.

These buyers, who are mostly unconcerned about import duties, are likely to continue to favour the more cost-effective cargoes from the Middle East and India.

Meanwhile, buyers whose finished products are slated for domestic consumption will be more vested in prices of non-dutiable PP cargoes.

By Leanne Tan