Concentrated PE start-ups in H2 ‘19 to weigh on SE Asia market

SINGAPORE (ICIS)–Southeast (SE) Asia’s polyethylene (PE) market is poised to continue on a rocky path in the second half (H2) of the year amid bearish sentiment, aggravated by concentrated plant start-ups, which could lead to oversupply should demand remain tepid.

While average first-half 2018 prices were largely stable-to-firm due to relatively tight supply, H1 2019 saw healthier supply outstripping demand growth.

Furthermore, market uncertainty stemming from the escalating US-China trade tension that manifested since July 2018 had weighed down on the market outlook in general.

As China is a major player in the PE market, its slowdown will eventually hit demand growth for PE across the globe, including southeast Asia.

In 2019, southeast Asian prices saw a brief stable-to-firm trend uptrend until April, before plunging in mid-May after the announcement of 25% US tariffs.

The US tariffs imposed on a list of China’s finished plastics products ruffled export-oriented convertors in China, curbing import PE demand, which led to softer prices.

The recent downward spiral in southeast Asia PE prices was a result of the market trying to correct itself and close the gap with the much weaker prices in China, as several southeast Asian converters expect regional PE prices to track that of China.

CFR SE Asia prices for linear low density PE (LLDPE) film of all origins gained moderately by about $20/tonne from January to reach $1,050/tonne CFR SE Asia in April, before falling to a decade- low of $960/tonne CFR SE Asia in mid-June.

Similarly, high density PE (HDPE) film grade prices rose around $30/tonne in the first quarter to peak at $1,115/tonne CFR SE Asia level before declining to a decade-low of $1,020/tonne CFR SE Asia in mid-June.

Even at these levels, the price gaps between China and southeast Asia were considered wide, at around $40/tonne for HDPE and $65/tonne for LLDPE in mid-June, as China prices continue to be under pressure amid tepid demand.

The price gap between China and southeast Asia was much wider for low density PE (LDPE) film grades at $95/tonne, with southeast Asia prices at $1,030/tonne in mid-June.

Many market players anticipate possible re-export cargoes from China to flow into southeast Asia, should the arbitrage window remain open in the longer run.

While converters across southeast Asia have been lamenting about the lack of demand uptick, suppliers were anxious that longer supply will worsen the supply-demand balance in second-half 2019.

More than 5m tonnes of additional PE capacities are expected in 2019, with close to 3m tonnes from the US and the rest from China and southeast Asia.

There are talks that Russia’s Sibur will commence the start-up of its PE plants with a total capacity of 1.5m tonnes/year by end-2019, but this could not be immediately confirmed.

As the bulk of the additional capacity is catered towards LLDPE production, prices for the grade may see stronger downward pressure compared with other PE grades.

The second-half 2019 outlook in southeast Asia is cautious as economic slowdown, weak local currencies and largely competitive domestic prices, might continue to dampen market’s confidence and curb import demand.

Many importers, including local stockists, have been keeping their inventory level very lean amid the uncertainties surrounding the US-China trade war.

Some converters in Indonesia and Vietnam are hopeful that they might receive additional orders from the US but they remained cautious amid the volatile and uncertain nature of the trade war.

“We need to ensure business continuity with these new customers, before we invest in new machines to fulfil their orders, but they cannot commit to a long-term business relationship,” said a converter based in Indonesia.

Seasonal demand typically resumes at the end of the third quarter in September, as converters will start receiving and preparing orders for the year-end.

Overall demand growth for PE in the longer term is expected to remain modest due to the economic slowdown and weak sentiment, on the back of growing environmental concerns on plastic usage.