Asia petchem markets bullishness set to continue amid tightening supply, high oil prices

Author: Nurluqman Suratman

2021/03/01

SINGAPORE (ICIS)--Across the board bullishness seen in Asia's petrochemical markets is likely to continue in the near term on tight supply in key China market ahead of its peak turnaround season, along with robust downstream demand and crude oil prices.

Recent petrochemical production outages in the US as a result of a polar storm earlier this month are also impacting Asia's trade as players seek to fill in the shortfall in global supply, as seen in the polyvinyl chloride (PVC) and  bisphenol A (BPA) markets.

“Swing producers” are diverting cargoes from China in search of much better netbacks in Europe, Latin America and the US – the three regions most directly affected by the US outages. Swing producers include those in the Middle East and South Korea, according to John Richardson, ICIS senior consultant.

Chemical plants and refineries in the US are beginning to restart their operations following the recent polar storm in the Gulf Coast, a process that could last for days or even weeks.

The shortages in the US are supporting Asia's vinyl acetate monomer (VAM) markets with discussions at record highs last week.

China’s refineries and downstream units typically enter the peak maintenance season from April each year.

Domestic Chinese markets have remained elevated following the Lunar New Year holiday on 11-17 February on worries over tight supplies and the bull run in the local futures markets, with high crude oil prices providing additional impetus for the uptrend.

“Market participants are expected to take long positions following extreme weather conditions in the US and concentrated schedule turnarounds of petchem plants in March and the second quarter,” said ICIS analyst Ann Sun.

“As Chinese market is more sensitive to the futures market, China is expected to lead the prices increases in Asia,” she added.

However, while apparent demand in key market China is seen stronger, questions remain as to whether this translates to sustainable, real demand "because of holes in the available macroeconomic government data, questions over the reliability of Chinese official data in general and different interpretations of what the numbers that we can get hold of are telling us", Richardson said.

Crude oil prices strengthened further on Monday on hopes of a quicker economic recovery after the US House of Representatives over the weekend voted 219 to 212 to pass President Joe Biden’s $1.9tr pandemic-relief plan.

By 03:15 GMT, Brent crude was up by $1.07/bbl at $65.49/bbl while US WTI was up $1/bbl at $62.5/bbl.

Both benchmarks registered double-digit monthly gains in February on supply disruptions in the US and optimism over demand recovery on the back of coronavirus vaccination programs globally.

Investors are now hoping that the meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies this week will result in more supply returning to the market.

Key petrochemical feedstock naphtha in Asia tracked the sharp rise in energy values recently, breaching $600/tonne last week amid concerns that US production restarts following winter storm-related disruptions will take longer than expected.

Further downstream, spot ethylene import prices in northeast Asia surged by at least 18% last week due to healthy demand on the back of reduced US supply while indicative prices for the propylene import market climbed to close to a 28-month peak amid strong gains in the polypropylene (PP) futures market.

Besides the impact of the outages in the US, the propylene market in China is seeing a sharp increase in several derivative markets after the Lunar New Year holiday, in particular oxo-alcohols because of strong demand from dioctyl terephthalate (DOTP), according to ICIS senior analyst Joey Zhou.

Downstream propylene industries in China "are expected to recover earlier than usual because of less cross-cities labour migration before/after the holiday", she said.

The bull run in China's domestic markets after a week-long Lunar New Year holiday are also supporting Asian spot prices across the board.

Melamine is set to see some spot supply tightness in the Chinese export market in the near term, and with some Asian buyers in the lookout for cargoes, sentiment is expected to be strong and this momentum could last until mid-March.

Phthalic anhydride (PA) spot market is likely to enjoy some support from a firm orthoxylenes (OX) market, snug supply in the region and healthy demand in the immediate future.

Asian spot discussions for butadiene (BD) edged higher last week, tracking the bull run in China's domestic market after the week-long Lunar New Year holiday last month.

The polyvinyl chloride (PVC) markets in India have also seen an increase in discussion levels amid the surge in upstream ethylene markets as well as bullish Chinese downstream markets and reduced US supply.

The uptrend in PVC has also boosted market sentiment in Asia’s vinyl chloride monomer (VCM) spot market.

In the aromatics markets, Asia's SM discussions went up further last week but demand is currently slowing down as short-covering tapers down after two weeks of strong gains.

In the mixed isomer-grade mixed xylenes (MX)  market, prices spiked on 25 February by nearly 8%, the market’s biggest single-day gain since 2017, on the back of strong downstream paraxylene (PX) and crude markets.

"For styrene and polyester industry chain, apart from the global fiscal and monetary stimulus, the unexpected outage at styrene plants and PX plants in the US is expected to result in less deep-sea cargoes in the following months," said ICIS analyst Jimmy Zhang.

"Market supply should be tight in the recent months. Market sentiment has been boosted sharply as well," he said.

With additional reporting by Trixie Yap, Keven Zhang, Koh Yuanlin, Jonathan Chou, Lim Ai Teng, Julia Tan, Al Greenwood and Joson Ng

Focus article by Nurluqman Suratman

Image: Chinese port