China PP under pressure from trade war, new capacities

Author: Dora Xue

2019/06/14

SINGAPORE (ICIS)--China's polypropylene (PP) import and domestic markets face downward pressure from prospects of supply glut and weak demand, brought on by new capacities and the fallout in trade negotiations with the US.

  • Weak demand caused by escalated US-China trade war
  • Oversupply from new domestic and overseas capacities
  • A market overview for first-half 2019

Both import and domestic PP prices have been falling amid the US-China trade disputes, with downstream demand hammered after the US slapped tariffs on $200bn in Chinese products from 10% to 25% as of 10 May.

This third round of tariff hikes directly impacts $13.2bn in Chinese chemicals and finished plastics exports to the US, according to the American Chemistry Council.

In the week ended 7 June, domestic prices for PP flat yarn grade in east China were assessed at yuan (CNY) 8,150-8,450/tonne ex-warehouse, down by CNY475/tonne from the week ended 3 May, the data showed.

Import PP raffia prices fell by $90/tonne over the same period to $1,020-1,050/tonne CFR (cost and freight) China, the data indicated.

Compounding the situation, rising supply triggered panic in the Chinese market as new capacities came onstream and more plants would be commissioned in the latter part of this year.

China’s Hengli Petrochemical produced qualified material at its 450,000 tonne/year PP plant on 2 May and Jiutai Energy’s 350,000 tonne/year PP plant has started up in early June.

Guangdong Grand Resource’s 600,000 tonne/year PP plant and Zhong’an United Coal Chemical’s 350,000 tonne/year PP plant are scheduled for trial runs in near future. Ningxia Baofeng’s 300,000 tonne/year plant will also start up in late 2019.

Reflecting hefty supply, the polyolefin inventories of the Chinese oil majors remained bloated at 830,000 tonnes on 12 June, ICIS data showed.

Outside China, fresh import supply is expected from new plants in India, Russia and Malaysia as well as from suppliers who are eager to divert cargoes from southeast Asia to China.

Supply would hail from Indian Oil’s new 680,000 tonne/year unit and Sibur’s new 500,000 tonne/year plant in Russia, while Malaysia's PETRONAS will commission its 900,000 tonne/year plant in late 2019.

There is also market talk that prices of some duty-exempted cargoes from the Association of Southeast Asian Nations (ASEAN) are below the values of Middle East-origin cargoes subject to import duties.

Some dutiable suppliers are desperate to sell cargoes to China at lower prices as the southeast Asian market could not consume such heavy volumes.

Meanwhile, a crude rout led to weaker PP prices. NYMEX WTI crude futures for July delivery experienced a sharp decline in May and June, settling at $53.27/bbl on 11 June, down by $12.01 compared with 25 April.

The market flipped from the first four months of this year when PP import prices increased owing to plant shutdowns led by S Oil’s 400,000 tonne/year plant, Saudi Polyolefins Company's (Tasnee) 730,000 tonne/year plant and Mangalore Refinery and Petrochemical Ltd’s (MRPL) 440,000 tonne/year facility.

Malaysia's PETRONAS had previously delayed commissioning its new 900,000 tonne/year PP plant due to accident.

In the first half of 2019, PP prices in other markets were higher versus those in China, and in response, suppliers allocated more cargoes to the other markets.

But, on the other hand, Chinese PP prices in China tumbled on the back of heavy domestic supply and tepid downstream demand.

Chinese domestic PP prices fell mainly in the first quarter but rebounded in end March and April. The temporary rise was likely to be the result of value added tax (VAT) cuts introduced from 1 April. These include a reduction in the VAT rate for manufacturers from 16% to 13%.

Against a backdrop of weaker domestic prices and the RMB (Chinese yuan) depreciation, the window for arbitrage exports to southeast Asia was open briefly in early May. As a result, China exported huge PP quantities, primarily to Vietnam.

However, the arbitrage window closed in end May as prices in southeast Asia spiraled downwards in part due to truckloads of Chinese imports.

Focus article by Dora Xue

Picture source: Imagine China/REX/Shutterstock

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