Europe chems grow bearish on coronavirus outbreak

Author: Morgan Condon


LONDON (ICIS)--As the coronavirus reaches a death toll of 213 people in China, uncertainty about the impact the virus will have is fuelling a bearish sentiment across the European petrochemical markets.

The Shanghai Municipal Government has extended the Lunar New Year break – already prolonged to 2 February across the country – until 9 February for most businesses, in the wake of confirmed cases in the city.

There are concerns that downstream production at Wuhan – the site of the outbreak – would be disrupted, which would ripple across to European petrochemicals markets.

A European phenol buyer pointed out Wuhan is an automotive and textile hub and how that could have an effect in many petrochemicals markets.

"PC [polycarbonate], BPA [bisphenol-A], nylon, and all the other engineering plastics [could be affected] ... It will hit certain manufacturing industries disproportionately hard," said the buyer.

"Some sectors around Wuhan will face a bigger impact.”

While there have been confirmed cases in Europe, these have been sporadic although have risen incrementally over the course of the week, with confirmed cases in Germany, France, Italy, Finland and the UK.

As yet there have been no fatalities outside of China, but the markets have recorded a more pronounced reaction to the outbreak.#

“The problem right now is with China – we will see a big loss of some products and demand, and it will impact the China growth rate for sure. We just don’t know by how much,” one re-seller of oxo-alcohols said.

Seasonally, the weeks surrounding the Lunar New Year cause trading to hit a lull, but the lockdown of 56m residents in China in an attempt to contain the virus could add length to global petrochemical markets.

ICIS Senior Analyst Ajay Parmar pointed to how a slight recovery in global manufacturing's sentiment in January had been sidelined this week by falls in crude oil prices.

“Despite generally positive news throughout January on the supply side, Brent prices have dropped by 12% in the past week. The effect on oil markets could be stark. Reduced travel across the country could leave vast quantities of oil products to flood the Asia market,” said Parmar.

European markets have largely reacted with caution this week, with some anticipating that the largest impact will be on the logistics slowing down cargoes, which could then disrupt market fundamentals.

The impact on shipping has divided opinions, with some suggestion of propylene glycol methyl ether acetate (PMA) volumes being delayed due to the virus, and discussion of some producers adjusting prices because of this.

According to a shipping source, this week there has been a significant slowdown, compared with the previous week, in the transatlantic route between Rotterdam and the US Gulf, which the source attributed to a change on sentiment.

“Of course, the stock market has taken a hit due to this so a bit of uncertainty around it, so it could be general market uncertainty impacting demand," said the shipping source.

"We will probably understand more in the coming weeks, but we are hoping for an uplift in transatlantic activity next week.”

Some players in the jet kerosene market are yet to see an impact on schedules, although acknowledged that this could change in the coming weeks.

As services in mainland China have been disrupted, sources suggest that additional jet kerosene volumes could head west given the low consumption rates and Lunar New Year holidays.

Given that the virus has coincided with China's biggest holiday season, the full impact it could have in global supply chains is yet to be seen.

Uncertainty was a word mentioned by many sources in the European petrochemicals markets.

"There is a lot of uncertainty. Their holiday has been prolonged and activity on any plant restarts will be delayed. There will be some effect, but it is a bit early to say and we are checking to see if our activities and vessels from China ports are subdued," said a source in the nylon market.

Meanwhile, there were contrasting views on what impact the crisis could have on the European polyethylene terephthalate (PET) market.

Some sources believe that while the impact has not been greatly felt yet, it is a question of time for the market to react.

“There are no delays yet – demand is weak, now everyone is waiting for a direction from Asia,” said one PET trader.

A PET buyer in Europe added that some customers "are panicking" about whether or not there will be colour pigments available if China can not supply.

"But if the virus spreads and the Chinese are down, and it spreads globally, there are more important things than if we can get PET on time,” it said.

“At the moment [the PET market is] very quiet. This is not due to the virus, it is due to the Chinese New Year and it’s the beginning of the year and the market is quiet anyway. People are afraid but it is not affecting business,” the buyer added.

However, others in the PET market said there had already been an impact on logistics.

“There will certainly be some delays to vessels … I have material that needs dispatching, but there is nobody there to take it to the port..." said another PET trader.

"The reality is everyone is waiting to see what happens in China … The government is allowing people back to work in the public service sector to keep the economy going - otherwise there would be no food, no produce, no life

"After 10 February, everyone will be allowed back to work as long as they wear masks and avoid crowded areas,” the PET trade concluded.

Attitudes on the aromatics market remain starkly different, with as-yet limited impact on market dynamics mainly caused by price volatility upstream.

Although the coronavirus has not been a central talking point in the European benzene market, trade activity has slowed in part due to the crude volatility caused by the outbreak.

Spot prices for benzene in Europe had been on a general uptrend since November, but have fallen by around 9% so far this week on sliding upstream prices and collapsing sentiment in Asia weighing down on prices in both regions.

There has been no talk of unscheduled turnarounds for styrene plants.

How this will impact import regulations was not dismissed across the market, with one European acetone buyer commenting that cargoes have been left on the water outside of China as there is uncertainty about when customs operations would resume.

“I've heard one trader saying they need to swap material out of Europe that typically moves from Europe to Asia. It's one of these deals the big guys set up to get rid of additional material,” the acetone buyer said.

Parallels have been drawn between this outbreak and that of the SARS virus in 2003. While China’s economy has grown exponentially since then, the country’s reaction has also adapted.

ICIS Analyst Ajay Parmar concluded: “Ultimately, the impact on the oil market will depend on the efficiency of the response by the Chinese government. During the SARS epidemic of 2002-2003, oil demand decreased by less than 200,000 bbl/day, but prices dropped by 30%.

"However, the response by Beijing has been much swifter this time. Therefore, we expect oil demand to decrease, but the panic will be contained much more than during the SARS epidemic.”

Front page picture: US national public health institute releases illustrations revealing structure of novel coronavirus, 31 January
Source: US Centers for Disease Control and Prevention (CDC) handout/EPA-EFE/Shutterstock

Focus article by Morgan Condon

Additional reporting by Eashani Chavda, Fergus Jensen, Jane Massingham, Caroline Murray, Clare Pennington, Shruti Salwan, Helena Strathearn, and Stephanie Wix 

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