Global chems trade slows on coronavirus uncertainty

Author: Morgan Condon


LONDON (ICIS)--The coronavirus outbreak continues to send shockwaves around the world as markets become bearish on perpetual uncertainty.

Efforts to contain the virus have disrupted global trade-flows of material in the petrochemicals industry, which has restrained movement in the shipping industry.

While public concern of the situation remains prominent, there have been discrepant views on how this has impacted the flow of chemical shipments.

As the site of the outbreak and a key driver of global petrochemical demand, sentiment in China will have a fundamental impact on the trade-flows of material across the world.

“Many cargoes have been re-routed from going towards China or cancelled following the extension of the Lunar New Year period. There are port delays and restricted vessel movements across the Chinese coastline as they wait for quarantine clearance before proceeding," said Maritime Strategies International (MSI) chemical shipping analyst Senthuran Raviraj.

"These vessel screenings have also appeared in ports across Asia and further afield in Kuwait, which will cause further delays to trade across all shipping sectors.

“The main impact will be on organic chemicals as the productivity of the recently commissioned mega-refineries compared with slowing down of domestic demand as the country faces internal logistical challenges, will cause Chinese imports to fall in the short term.”

Demand for polyethylene (PE) in China could drop by around 1.5m tonnes, according to a senior analyst at ICIS.

“Around 1.5m tonnes of PE demand may be lost from the coronavirus outbreak if it can be controlled and downstream industries resume operations at a 70-80% rate by the second half of March,” said Amy Yu, senior analyst, ICIS Asia Petrochemical Analytics, based in China.

PE consumption in China for 2019 was expected to total 35m tonnes according to ICIS data.

Typically the Lantern Festival – the week after the Lunar New Year – marks peak season for the plastics industry as production returns following a seasonal lull.

Instead, traders who stocked up ahead of the festivities to avoid higher prices often associated with the new year are lumbered with material that had appeared promising on the back of lifting demand.

Even domestic logistics stagnated as truck drivers need permits for each province they travel through, slowing the delivery of material between cities and provinces.

Hubei remains in quarantine, with province authorities asking for business to be suspended until 11 March. As a key manufacturing hub, this is likely to suppress growth in sectors like the automotive industry.

Other regions have returned to work but production in the chemicals sector could continue to lag as companies further on in the value chain mark a slow return to the market.

“The average operating rate of downstream factories is estimated at about 40% because of the lack of workers until the end of February,” said Yu.

Demand for blow moulding high density PE (HDPE) used for medicine bottles is increasing but this accounts for less than 2% of total PE demand, the analyst pointed out.

“Most of the impact is on packaging consumption, which is estimated at 1m tonnes of lost PE demand. Plastic films used for packaging consumed around 18m tonnes of PE in 2019, accounting for 51% of 2019 PE demand,” said Yu.

With the authorities limiting trade to supermarkets and pharmacies only, the consumer goods, packaging and automotive sectors are expected to mark the biggest decline.

Mixed opinions present an opaque picture of how this will impact both logistics and demand further afield.

Because of the lack of clarity, opinions about how big an impact this will have remains diffuse, depending on the region and the product.

While the World Health Organization (WHO) has advised against unnecessary restrictions of international traffic, there have been concerns that shipments of material will be impacted.

Regardless of any regulatory changes, the impact of crashing demand has already started to weigh on production in the chemicals industry.

One trader dealing in the East African market spoke of delayed vessels, as some shipping firms cancelled shipments for the entire Asian routes.

Although new recorded cases of the virus have started to decline in mainland China, as new cases gain traction in other countries this could slow trade on a global scale.

As confirmed cases of the virus have shot up in South Korea, then this could further disrupt vessels to and from northeast Asia.

Sentiment in the US has been more uniform in identifying the coronavirus as the causal factor disrupting shipping cargoes.

“There has definitely been an impact.  Some cancelled cargoes/voyages.  Bunkers have been down considerably.  It is also affecting scrubber installations in China I hear,” said one US-based ship broker.

Another ship broker in the region advised that vessels berthing and un-berthing in Chinese ports are required to conduct self-inspections.

Most port authorities had required every crew member’s temperatures to be taken and crew members had been prevented from disembarking unless necessary.

Charterers had been delaying confirmation of their nominations for vessels sailing into and out of the region as if a port were deemed unsafe, charterers would be made responsible for nominating an alternative port.

As bulk shipping is reliant on China’s demand for imports remaining robust, a prolonged shutdown of the Chinese economy and industrial production will deepen the seasonal slump.

The lasting repercussions on the Chinese and international markets are yet to be fully recognised as the risk of contagion lingers and could continue to weigh down on demand in the long term.

Focus article by Morgan Condon

Additional reporting by Joseph Chang, Ben Lake, Clare Pennington, Adam Yanelli and Fanny Zhang

To visit the ICIS coronavirus topic page click here

Front page image: Shipping containers at the port of Qingdao in China. Source: Sipa Asia/REX/Shutterstock