Asia petrochemical glut bites as SE region in recession, China demand wanes

Author: Pearl Bantillo

2020/08/14

SINGAPORE (ICIS)--Petrochemical markets in Asia are grappling with oversupply, with consumption in the southeast region weighed down by recession in most major economies, while the months’ long burst of post-lockdown demand in China is waning.

Downstream plants across the region continue to run at reduced rates due poor demand, with most producers and end-users alike saddled with high inventories.

Fears of another wave of coronavirus infections continue to limit overall economic activity.

Most major countries in southeast Asia posted sharp economic contractions in the second quarter, while the number of infections in countries such as Indonesia, the Philippines and India continue to spike.

In China, which was the original epicentre of the outbreak, new cases are still being reported daily.

Heightened uncertainties over the implementation of the US-China Phase 1 trade deal also cloud the market outlook for Asia .

SUPPLY OUTPACES DEMAND
“To some extent in China, what I think has happened is production has got ahead of demand,” ICIS senior consultant John Richardson said.

“Some of the H1 numbers on petrochemicals production and net imports as a result point towards overstocking,” he said.

Oil imports of the world’s second-biggest economy grew nearly 10% year on year in the first half “as refiners took advantage of cheap crude, and as the government, I think, decided to give manufacturing all the way down to finished goods a post-pandemic boost”, Richardson said.

In the paraxylene (PX) market, a supply overhang is expected to persist through to September despite output cuts triggered by weak production margins.

Inventories are high due to a heavy turnaround schedule at downstream purified terephthalic acid (PTA) facilities in August.

Demand from downstream polyester markets such as textiles and garments is being weighed down by surging coronavirus infections in India, which now has the third-highest cases globally at nearly 2.4m, and in Indonesia, which has the second-highest number of infections in southeast Asia.

Any near-term recovery is deemed elusive for the time being.

For xylene, regional supply is ample due to subdued import demand from China, where inventories are high and storage space is limited.

For isopropanol (IPA), supply is expected to lengthen as buyers have sufficient inventories. Market sentiment is bearish as upstream acetone prices remain on a downtrend.

In the case of ethanolamines, supply is more than sufficient to cover weak demand, while for methyl ethyl ketone (MEK), much would depend on how Chinese domestic demand will fare in the near term.

In the polystyrene (PS) markets of the Middle East and south Asia, price support would crumble as demand from China weakens.

Robust Chinese demand over the past two months had driven up prices in the Middle Eastern and south Asian markets, where consumption is tepid at this time of the year.

SEASONAL DEMAND BUOYS UP SOME MARKETS
In the methyl tertiary butyl ether (MTBE) market, support comes from seasonal restocking of downstream gasoline in China ahead of its week-long National Day holiday in October.

For linear alkylbenzene (LAB), supply in Asia would tighten with fewer export volumes from China, where domestic demand is robust.

Chinese suppliers were helping cover requirements in the local market with a unit of Jintung Chemical shut since late July.

For polyvinyl chloride (PVC), domestic demand in China is likely to be sustained at least until the October holidays but is expected to taper off thereafter as construction activities will slowdown with the onset of winter.

For ethyl acetate (etac), exports of August-loading parcels from China were limited. Negotiations are ongoing but at a slow pace.

Producers are not lowering offers substantially to maintain some margins due to a relatively stable feedstock acetic acid market.

In the butyl acetate (butac) market, demand in southeast Asia region is still in a recovery mode since some countries are still in lockdown.

Any potential uptick in near-term demand is expected to be gradual.

Indonesia, Malaysia, Singapore and the Philippines have all reported unprecedented GDP contractions in the June quarter as a direct result of lockdowns adopted to contain the deadly novel coronavirus pandemic.

Country Q2 GDP (Year-on-year growth)
Indonesia -5.3
Malaysia -17.1
Singapore -13.2
Philippines -16.5

HIGH INVENTORIES DEPRESS DEMAND
Spot market activity for petrochemicals is being hampered by high inventories at both producers and end-users alike.

For synthetic rubber, “demand has faded out amid price increases”, ICIS analyst Ann Sun said.

“We have seen tyre exports pick up amid the global lockdowns. Therefore, weak buying interest of synthetic rubber is a sign of a build-up of inventory from April to July rather than slowing down end consumption,” she said.

Pre-holiday restocking in China is not expected to be as strong as in the past years as buyers have sufficient supply and with new capacities coming on stream from August to OCtober, she added.

China will celebrate its week-long National Day on 1-7 October.

“Demand from southeast Asia is expected to offer more support to prices than China,” Sun said.

In the polyethylene (PE) market, many buyers in China have built up high inventory since the second quarter, when prices were depressed, ICIS analyst Amy Yu said.

“They will digest these inventories before restocking, which will limit a part of demand in September,” Yu said.

PE demand is also seasonally weak in August given high temperatures in most of China.

Some pick-up in consumption is possible in September, when production in downstream industries enters peak season, Yu said, citing the agricultural film, construction and manufacturing industries.

“Many of these will need to replenish PE cargoes before October holiday,” she said.

For polypropylene (PP), “buyers remain cautious about restocking, with the threat of a second wave of the coronavirus in major markets across southeast Asia and increasing supply”, ICIS analyst Joey Zhou said.

“PP demand for use in woven bags and pipes is expected to improve next month when the impact of flood disaster eases in some provinces, and PP demand could increase as construction resumes,” she said.

STRONG RECOVERY FOR REST OF 2020 IN QUESTION
China, which is the world’s second-biggest economy and Asia’s largest, managed to reverse its GDP contraction in the second quarter, being the first to emerge from a paralyzing lockdown induced by the pandemic.

More than a month into the second half of the year, the global picture is still muddled with uncertainties.

“China’s real GDP growth was nothing like 3.2% - the official number - when you look at all the underlying data. [For example] H1 retail sales, although much better than the rest of the world, was down 11.4%,” ICIS senior consultant Richardson said.

“Future export orders are down, and can this type of pandemic demand replace all the lost orders in other areas? I doubt it. Textiles, for example, are a very important part of China’s export mix,” Richardson said.

China is largely expected to flex its financial muscle to boost the economy further in the second half of the year.

But exports, a major economic growth engine for China, may not improve much with the rest of the world wallowing in a pandemic-induced recession.

Insight by Pearl Bantillo

Photo: A Filipino wearing a face mask walks outside of a hospital in Manila, Philippines. (FRANCIS R MALASIG/EPA-EFE/Shutterstock)

Additional reporting by Jonathan Chou, Keven Zhang, Samuel Wong, Yuanlin Koh, Prateek Pillai and Melanie Wee

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