INSIGHT: Mixed chemical supply outlook as trade flow pattern enhances in Mideast

Author: Felicia Loo


SINGAPORE (ICIS)--The Middle East’s chemicals supply scenario paints a mixed picture this year, with some products being tight while others will see new capacities in the region, or inflows from other sources.

With Saudi-led Gulf Cooperation Council (GCC) members having restored relations with Qatar, intra-regional petrochemical undertakings will be elevated, with more businesses expected.

Polyethylene (PE) and polypropylene (PP) processors in Saudi Arabia can now supply products to the Qatari market.

Saudi PE and PP producers are thus hopeful of improved resin uptake following the historic event that brings optimism to the processing community in Saudi Arabia, the latter being a major processing hub in the Middle East.

Asia can also expect better and stable supply from the GCC region following the deal.

The GCC countries are typical exporters of polyolefins to Asia, particularly for the Chinese market.

Qatar is the fourth biggest PE producer in the region - with more than 2m tonnes of PE produced in 2019 - and strongly export-oriented, according to ICIS market analyst Lorenzo Meazza.

"We are talking about an area where the main countries are also important PE producers which benefit from a considerable surplus balance - they produce a lot more than they consume," said Meazza.

This means that the improved relationships between Qatar and Saudi Arabia will probably have small effects on intra-regional trade flows, since volumes are small, he added.

"However, both the countries will likely benefit from improved collaboration in the region. Also Oman will soon become an exporting country, thanks to new PE projects starting operations in the current year. The deal will likely improve logistics in the region, favouring trade flows from Middle East to the rest of the world," Meazza said.

Middle East base oils supply is likely to remain tight at the start of the new year, with little change in current market fundamentals expected at least through the first quarter of the year.

Base oils Group I supply has been tight because the main producers in the region, based in Iran, have been struggling with multiple challenges including the impact of the COVID-19 outbreak, sanctions against Iranian shipping lines, and with the added element of politics likely continuing to plague its troubled export segment.

Since most virus-control restrictions have been eased across the Middle East, demand has improved. Group I supply has struggled to keep pace, however,  as some producers have either reduced output during the lockdowns or directed most of their cargoes to term buyers due to the sluggish spot market then.

Iran is a major Group I base oils producer in the Middle East and there are currently four refineries actively producing base oils, mainly for the engine oil lubricant industry.

Supply of base oils from Iran to the region’s main trading hub, the UAE (United Arab Emirates), slowed to a trickle over the last quarter of 2020, with volumes shrinking to less than half the monthly requirement of the UAE market.

The UAE is a major trading and blending hub for base oils and is a main entry point for cargoes before they are re-exported to other destinations in the Middle East and Africa.

According to sources in Iran, the impact of the COVID-19 pandemic on refinery production rates, coupled with increased blending requirements for domestic use, resulted in lower volumes available for export.

The spot polyvinyl chloride (PVC) markets in the Middle East and South Asia will continue to face a supply shortfall this year, as some plants remain off line, while others have scheduled turnarounds in the US and Europe in Q1.

Both the Middle East and South Asia are heavily reliant on imports as domestic production is unable to meet consumption needs, particularly India, which is currently the world’s biggest importer of PVC resins.

With new supply capacity set to be installed in China, the availability of toluene diisocyanate (TDI) cargoes in the Middle East is expected to improve, thus diminishing the need for buyers to stock up on cargoes in anticipation of a possible supply crunch due to unplanned plant outages.

The supply of polyols cargoes is also expected to improve in 2021 with new capacity set to be added in Asia and Europe.

With polyols being used as co-feedstocks along with TDI in the production of polyurethane (PU) foams, the easy availability of polyols is further likely to help TDI demand patterns stabilise.

Meanwhile, demand for polymeric diphenyl diisocyanate (PMDI) is expected to follow a different trajectory in 2021, with the coronavirus pandemic having exacerbated a long-running slowdown in the Middle East construction industry, which absorbs the bulk of PMDI cargoes in the market.

While the supply for PMDI is also expected to improve in 2021, the underlying weakness in demand means that overall market activity is likely to remain stagnant.

Middle East polyethylene terephthalate (PET) buyers have become more reliant on regional supply in 2020 amid the pandemic and uncertainties, and this trend to rely more on regional suppliers is likely to continue, especially since new capacity is expected to come mainly from Saudi Arabia.

There was a conceptual plan previously for a 1m tonne/year plant in Saudi Arabia by Pan-Asia Saudi Company Limited slated to come onstream in 2021, though its development and construction status have not been confirmed yet.

In China, new capacity of 500,000 tonnes/year in Zhuhai by China Resources Chemical Innovation Material Holdings is expected to start up in the first half of 2021.

If the plant in Saudi Arabia comes onstream, it will have a significant impact on the market balance in the Middle East, as it will mean a 43% increase in Middle East supply.

Middle East buyers that have become more reliant on regional supply may further reduce their imports from Asia.

Veering towards a downtrend, the polystyrene (PS) markets in the Middle East and South Asia will continue to face bearish demand and tight supply this year.

In the Middle East, PS demand is mostly concentrated around packaging and construction related applications.

Both general purpose PS (GPPS) and high impact PS (HIPS) are used in the packaging of food products as well as in the manufacturing of small-scale plastics such as lunch boxes, trays and containers.

GPPS is also used in the manufacturing of insulation sheets used in the construction sector.

Demand from the packaging sector has been gradually diminishing over the years, however, especially for HIPS as buyers have increasingly substituted the commodity with either PP or polyethylene terephthalate (PET) due to lower prices and fewer environmental ills associated with the latter two products.

At the same time, the coronavirus pandemic has worsened long-running issues facing the construction industry in the region.

With many projects mothballed amid a drying up of investment, market players do not expect the situation to improve much in 2021, a development that is set to limit PS demand further.

Meanwhile, on the supply side, a lack of cargo availability has meant that many buyers have been unable to procure the required stock amounts.

The situation has been worsened by roaring demand in China, which has sharply limited the quantity of Asian cargoes exported to the Middle East, causing buyers to rely on regional producers.

Additional reporting by Izham Ahmad, Prateek Pillai, Hazel Goh and Zhi Xuan Ho

Insight article by Felicia Loo