Competition to heat up in SE Asia PP market on new capacities in H2

SINGAPORE (ICIS)–Fiercer competition among polypropylene (PP) suppliers in southeast Asia could tip the market into a long position in the second half of the year, as new capacities in the region begin to come on stream.

Sacks of rice at a port in Jakarta, Indonesia. PP is used in sacks. (Photo by Adi Weda/EPA/Shutterstock)

The year kicked off to a slow start, with market sentiment dampened by weak macroeconomic fundamentals.

Poor manufacturing market indicators in southeast Asia, the depreciation of regional currencies and volatile upstream crude oil values all contributed to lacklustre demand.

However, scheduled and unscheduled outages at major production sites in both the Middle East and southeast Asia had curtailed supply, providing some support to spot prices in the first quarter.

Spot prices peaked so far this year on 3 May, with PP flat yarn grade of all-origins hitting an average of $1,165/tonne CFR (cost and freight) SE (southeast) Asia, before plummeting in mid-May, according to ICIS data.

Heightened trade tensions between the US and China weighed on sentiment in southeast Asia, deterring traders from taking significant positions for June- and July-arrival cargoes.

Vietnam saw an incursion of competitively priced Chinese-origin cargoes, as suppliers pushed export volumes amid sharp declines in domestic PP prices in China.

Consequently, PP flat yarn all-origins spot prices tumbled by 9.4% from mid-May to an average of $1,055/tonne CFR SE Asia on 14 June.

The outlook for the second half of the year remains clouded by regional capacity expansions and global trade tensions.

SE ASIA PRODUCTION TO SURGE IN H2
Competition among southeast Asian producers could intensify, especially in the fourth quarter, as several new plants in the region are scheduled to be operational by the end of the year.

In Malaysia, the Refinery and Petrochemical Integrated Development (RAPID) project in Johor – which is a 50:50 joint venture between Saudi Aramco and Malaysia’s state-owned oil and gas company PETRONAS – is due to come on stream by the end of 2019.

The project has a huge nameplate PP production capacity of 900,000 tonnes/year.

In Vietnam, Hyosung Chemical is expected to start up its 320,000 tonne/year PP unit at the end of the year.

In Indonesia, Chandra Asri Petrochemical (CAP) is slated to conduct debottlenecking works at its production site in Cilegon, which would expand its PP capacity by 80,000 tonnes/year.

These new capacities in the region will likely result in growing export volumes to China and India.

Ever since Vietnam’s Nghi Son Refinery and Petrochemical (NSRP) started up its 400,000 tonne/year production unit back in mid-2018, the country’s export volumes to China have grown significantly.

In a similar fashion, exports from Malaysia are likely to increase steadily, as the country maintains its drive to become a major regional hub for petrochemical trade.

As many of these capacity expansions are taking place within southeast Asia, availability of duty-free origin PP materials is likely to lengthen further.

As it is, spreads between dutiable and non-dutiable prices have already narrowed to all-time lows over the last year, and this scenario is likely to persist for the rest of 2019.

CHINA-SE ASIA PRICE SPREADS TO IMPACT TRADE FLOWS
The spread between Chinese and southeast Asian import prices is another factor that could impact market fundamentals, especially in Vietnam.

Usually, prices in Vietnam closely track domestic and import values in China, after a short time lag of around a week.

Suppliers of Chinese materials typically take full advantage of this slight lag, pushing export volumes whenever margins in the export sector are deemed attractive in comparison to those in the domestic Chinese market, with varying degree of success.

Both coal-based and naphtha-based Chinese PP materials have received a favourable reception in Vietnam, where they also enjoy duty-exempt status.

Meanwhile, converters and end-users in Indonesia and Thailand have yet to warm up to Chinese-origin cargoes.

Nevertheless, as the Chinese PP market inches toward self-sufficiency with several capacity expansions in the works, many market players expect export volumes from the country to grow.

Month-to-month export volumes would depend highly on the magnitude of price spreads between China and southeast Asia.

A wider spread is likely to encourage Chinese suppliers to export cargoes, while they would be more inclined to sell cargoes in the domestic market when the spread is narrow.

On the demand front, heightened trade tensions between the US and China could continue to leave buyers cautious.

Weak economic data are likely to continue to put a dent on expectations for downstream consumption in southeast Asia.

Focus article by Leanne Tan

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