INSIGHT: Fast-spreading Delta variant may roil Asia chemical markets, demand

SINGAPORE (ICIS)–Open. Close. Open. Close. In a strategy to battle the crippling, defiant COVID-19 virus, it is common for countries to adopt snap lockdowns or partial ones as the occasion rises, and re-open when the threat diminishes.

With the Delta strain in every nook and cranny of Asia, economies could be brought to their knees amid fast-rising cases of COVID-19, the global death toll having surpassed 4m.

To some degree, the highly transmissible Delta variant could even upend demand in petrochemical and oleochemical markets.

“Asia PE [polyethylene] demand in the short-term is foreseen to be disrupted further by re-lockdown measures in some Asian countries and regions. As some lockdown measures also have resumed in some areas within China,  logistic issues will increase somewhere,” said ICIS senior analyst Amy Yu.

China’s demand has been dented in August because of power shortages, though August usually is the peak period for electricity consumption, Yu pointed out.

“Some plastics processors in southern China have to cut their operating rates this month. While many regions in China are in flood season, demand from the plastic pipe sector will be weak,” Yu explained.

“Moreover, due to tight containers and high freight rates, some plastic finished processors have reduced their exports orders as they cannot undertake the cost,” she said.

As China is dealing with the highly contagious Delta variant, which saw recent spikes in local cases, logistics in many places were affected by stricter restrictions and some imported cargoes of polyolefins were delayed in Jiangsu ports due to those restrictions.

Sentiment turned bearish as players worried that downstream factories may have to shut or cut rates in future if the virus worsens. Weak financial futures also dampened polyolefin markets.

On 4 August, polypropylene (PP) and linear low density polyethylene (LLDPE) futures fell for three consecutive days.

A similar story unfolds in Asian polyester. “Before the Delta surge, we expected a tourism rebound in China in Q4 and clothes consumption in September. The market has also piled up inventory for the potential peak shopping season,” said ICIS analyst Jimmy Zhang.

The fresh lockdowns would put a brake on tourism and logistics recovery.

“Clothing and polyester demand should be seriously impacted. Exports, products and manufacture have to keep at slow pace, such as household appliances, and demand would decrease for acrylonitrile-butadiene-styrene (ABS), polystyrene (PS) and expandable polystyrene (EPS),” Zhang opined.

“Such pessimistic sentiment has already been reflected in sharp decreases in petrochemical futures in recent days, like purified terephthalic acid (PTA) and styrene,” he added.

On ethyl acetate (etac), concerns over coronavirus and the Delta variant in part served to moderate the upward pressure on the overall market.

Countries including Thailand and Vietnam are seeing a rapid rise in infections.

“Overall demand is not good. Factories with employees affected also don’t want to be so aggressive or have to shut operations,” said a regional-based source.

“Hospitals [in Thailand] are overwhelmed, People are allowed to go home to self-quarantine. [Daily coronavirus] cases have broken the 20,000 level,” added the source.

In Vietnam, demand is declining as the country grapples rising coronavirus cases.

“Demand has disappeared by 30-40% due to many factory closures and stricter movement control,” said another regional-based market source.

Concerning recycled polyethylene terephthalate (R-PET), producers and converters were worst hit in the week, recycling-wise.

Producers and converters alike are required to allocate space in their respective plants to accommodate 10% of their staff that are categorized as “Green” Covid cases. Green is for those who have Covid but do not require hospital care.

Most producers and converters are either cutting or halting their operations and very few producers are able to operate as per normal.

As informal waste collection is prevalent across southeast Asia, this meant that the lockdowns have significantly curbed collection activity and thereby the volume of waste to be used as feedstock.

Also, Asia’s fatty acids demand has waned and may remain subdued in the near term as buyers retreat to the sidelines because of mounting concerns over the resurgent infections, including outbreaks in China.

All in all, manufacturing activities in southeast Asia took a heavy hit in July amid various forms of lockdowns in place across countries in the region, while industry expansion in China and South Korea slowed down amid continued supply chain disruptions.

Most Asian economies registered lower readings in July Purchasing Manufacturers’ Index (PMI), indicating a deterioration in business operating conditions.

However, it is not all doom and gloom considering that countries are persevering with vaccination roll-outs.

“The Delta variant outbreak in the 14 [Chinese] provinces is worrying, but I think China has the capacity to bring the new outbreaks under control fairly quickly,” said John Richardson, ICIS senior consultant Asia.

“This doesn’t mean to say that we won’t see oil and petrochemicals prices heading south as long as the outbreaks continue, as markets move on sentiment. This could damage apparent demand as petchem buyers hold back on purchases in anticipation of lower prices in the future,” he added.

“But once, hopefully soon, China gets the latest outbreaks under control, we will see the reverse momentum of rising prices and restocking – or “buying ahead” – by the buyers,” Richardson said.

Additional reporting by Helen Yan, Lucy Shuai, Arianne Perez and Melanie Wee

Insight article by Felicia Loo

Photo: China Macao COVID-19 Mass Testing – 4 August 2021 (Photo by Xinhua/Shutterstock)