Asia PP capacity expansion poses challenges to Mideast suppliers

SINGAPORE (ICIS)–Significant polypropylene (PP) capacity expansion in Asia could squeeze the market share of Middle East suppliers in the region.

In the coming three years, 80% of the global PP expansion is concentrated in Asia, where capacity is expected to increase over the period by more than 8m tonnes/year, more than two-thirds of which will be in China.

On the other hand, capacity expansion in the Middle East is limited, with only Orpic’s 300,000 tonne/year unit in Oman expected to come on stream in the first quarter of 2020, and Borouge’s 450,000 tonne/year unit in the UAE due to start up around 2022.

The Middle East has been the largest PP net exporting region in the world, with more than 40% of shipments flowing into Asia, according to the ICIS Supply and Demand database.

For China, which imports about 5m tonnes of PP on an annual basis, Middle East cargoes accounted for about a fifth of the total since 2017, the data showed.

Going forward, Middle East-origin cargoes may flow more into North America and Europe, where demand is expected to increase amid scarce local capacity expansion.

Despite the expected shift in trade flows stemming from capacity expansions in the coming years, the Middle East’s share in the Asian PP market will be supported as its producers have more room to adjust down offers in a market downturn given their cost advantage over peers in other regions.

Some buyers in China also deem Middle East PP cargoes are of better quality as they contain lower volatile organic compounds (VOC) compared with locally produced material.

Middle Eastern producers using liquefied petroleum gas (LPG) as feedstock still enjoy strong a cost advantage over Asian producers regardless of processes.

LPG is readily available in the Middle East, whereas China relies on imports for raw materials such as crude and propane.

Chinese PP producers which use feedstock propylene from propane dehydrogenation (PDH) units generate much higher margins compared with those that directly purchase propylene and methanol as raw material for production. The propane feedstock for PDH plants in China, however, are mostly imported from the Middle East.

This meant that despite recent declines in PP prices, the margins of Middle Eastern producers were still much higher than those of Asian producers.

In addition, import forward cargoes are popular among traders operating both in the Chinese futures and spot markets for hedging and arbitrage purposes compared with domestically-produced spot cargoes, for which they would need to pay storage fees.

It usually takes one to two months for cargoes from the Middle East to reach China, making them perfect to back futures contracts traded on the Dalian Commodity Exchange (DCE), industry sources said.

Focus article by Dora Xue

Photo: A container ship at Hamad port in Doha, Qatar. (By Noushad Thekkayil/EPA/Shutterstock)

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