Asian chemical demand sentiment mixed post-Lunar New Year

Author: Felicia Loo

2021/02/02

SINGAPORE (ICIS)--Unlike previous years, post-Lunar New Year chemical markets in 2021 will be uniquely different in China - the world's number-two economy - as well as in other parts of Asia where the holiday is celebrated.

This year will be adopting the playbook of the unprecedented 2020 as the pandemic continues to rage on, with the visceral difference of having vaccines in place and global inoculation is being rolled out at different pace and rate.

While China will soon celebrate the Lunar New Year (11-17 February), businesses and factories will resume operations earlier than expected after the period, as millions of Chinese migrant laborers in the cities were told to stay put given growing coronavirus cases in northern China that prompted lockdowns of selected cities and areas in January.

At issue, the extent of plastics demand recovery in Asia remains to be seen on prospects of businesses resuming earlier than past years, when factories shut for two to four weeks during the holiday in China.

"Most of small and medium plastic processors in China will gradually resume operations after 26 February. Demand may recover earlier than usual as some workers will not go back to their hometown this year. The labor shortage might not be serious this year," said ICIS senior analyst Amy Yu.

This novel trend to resume businesses faster than previous years after the Lunar New Year will be a boon to the Chinese economy, with manufacturing having already expanded for 11 consecutive months, and to Asian plastics demand at large.

"A lot of China’s demand last year came from exports, particularly pandemic supplies like masks, laptops and screens for working at home. Some of this demand is likely to continue this year with rolling lockdown measures across Europe and other Western countries," said ICIS senior analyst Rhian O’Connor.

"Shopping patterns have shifted, with more online purchases and this is unlikely to change in the future. This benefits packaging polymers like shrink and stretch wrap film, as well as more durable goods like polymers for electronics," O'Connor added.

"Special applications like polypropylene for syringes should benefit from vaccine demand. However, these remain small as a proportion of overall demand."

A slowdown in China’s factory activities in January - as reflected in the decline in its official purchasing managers’ index (PMI) to 51.3 from December’s 51.9 - was inevitable on the twin effects from the upcoming Spring Festival holiday and resurgence of pandemic infections.

A private survey by Chinese media group Caixin indicated that China’s general manufacturing purchasing managers' index fell to 51.5 in January from 53.0 in December as business conditions improved at the slowest rate for seven months.

Companies signaled softer increases in output and new orders, alongside a renewed decline in new export work, as the coronavirus pandemic weighed on demand conditions, it said.

"Domestic [Chinese] demand should be dented in Q1, with localised virus outbreaks reducing travel plans. This could impact on sales volumes during the Lunar New Year holidays," O'Connor opined.

Meanwhile, in southeast Asia, lockdown restrictions have been re-introduced in Thailand, Indonesia and Malaysia.

This, coupled with rising poverty and more basic shopping channels in these areas, has reduced demand for both packaging and durable goods such as cars and white goods, according to O'Connor.

Regarding key chemical polyethylene (PE), China's import supply has tightened owing to better netbacks in other Asian markets.

On the one hand, China arbitrage window closure may dampen supply, but on the other hand, re-stocking demand in southeast Asia may also keep market supported.

"Supply in Asia will remain tight in February due to some scheduled and unexpected outages in the Middle East. But the supply will ease from March, following the start-up of new capacity in Asia and plants resuming after outages," Yu said.

Concerning polyethylene terephthalate (PET), many producers have good orders on hand for February-loading allocations and are in no hurry for sales.

PET producers typically keep operation rates stable at high levels through the holiday, and they will be able to manage some build-up of stocks since overall inventories are currently low.

The current overall operating rate of PET plants is around 73%, according to ICIS data.

In the acetic acid market, buying impetus escalated in northeast Asia due to supply shortages occurring earlier than anticipated.

This followed a recent unplanned plant outage in Japan in addition to weather-related port congestion which led to delayed shipments of term cargoes from China to South Korea.

Plus, buying incentives occurred due to stock building ahead of turnarounds scheduled in South Korea, Taiwan and Japan in the second quarter.

In Asian oxo-alcohols, tight spot supply prevailed, particularly for n-butanol (NBA), whose prices were being supported by higher demand from outside of Asia and plant shutdowns.

The tight supply situation was exacerbated by production woes at South Africa’s Sasol, which declared force majeure for NBA and isobutanol (IBA) on 21 January.

For methanol, spot supply in Asia should remain on the tighter side in the near term especially after the unexpected shutdown of Kaltim Methanol Industri’s plant around 21 January, leaving demand gaps in Indonesia, southeast Asia's biggest economy.

Analysis by Felicia Loo

Additional article by Helen Lee, Izham Ahmad, Lucy Shuai, Hazel Goh, Jude Chan and Kite Chong

Photo: Lunar New Year lanterns in Shenyang, northeast China's Liaoning Province, 01 February 2021. (Source: Xinhua/Shutterstock)

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