INSIGHT: Weakening Asian currencies stifle petrochemical demand

Felicia Loo


SINGAPORE (ICIS)–The continued depreciation of Asian currencies against the strong US dollar is quashing hopes of a petrochemical demand recovery, as imports become more expensive, eroding the purchasing power of buyers in the region.

  • Demand already weak on geopolitical issues, high energy prices
  • Markets stymied by inflation, recession risks
  • COVID-19 resurgence, persistent supply-chain issues prevail

It stands to reason that “anyone outside the US who want to trade has to put up more collateral in local currency, and end-users have to pay more in local currency,” New Normal Consulting chairman Paul Hodges explains.

“Rising dollar effectively reduces liquidity as most commodities are priced in [US] dollars.”

“So, when the [US] dollar rises, commodities tend to fall, which is what has happened to many of them since the rise began at New Year,” he added.

Hodges pointed out that “we are living in a world more like that of the 1970s/80s than the past 20 years. Geopolitics are dominating, energy prices are high, and inflation is taking off”.

“In these circumstances, central banks can’t do very much – they can’t stop [Russian President Vladimir] Putin, they can’t pump more oil/gas, and they can’t do much about inflation apart from allowing interest rates to rise till they match inflation,” Hodges added.

On 21 July, the European Central Bank (ECB) hiked its key interest rate by 50 basis points (bps), the first rise in 11 years, following the wrap-up of quantitative easing measures at the start of this month, and estimates that eurozone inflation hit 8.6% in June.

Rising interest rates globally in view of several rounds of monetary tightening to tame surging inflation further deter consumption, and are now threatening to plunge the world into another recession.

The US dollar is considered a “safe haven” currency during times of economic turmoil, with its strength this year underpinned by aggressive interest rate hikes by the Federal Reserve Bank.

The Fed is expected to raise interest rates by another 50bps next week, following a 75bps hike on 16 June, as June inflation stood at a four-decade high of 9.1%.

Energy prices have remained high, with Brent crude still trading at above $100/bbl about five months since Russia invaded Ukraine in February, and the global adverse repercussions continue to grow.

Compounding the situation is the unyielding zero-tolerance strategy of China in tackling COVID-19 which suggests that sentiment will remain bearish for quite some time.

In the second quarter, the world’s second biggest economy barely posted year-on-year growth, while registering a 2.6% contraction quarter on quarter, due to lockdowns imposed across the country following a resurgence of COVID-19.

“The stop/start nature of the recovery in China has been underlined by more mass testing and lockdowns. As of earlier this week, some 19% of the economy was subject to zero-COVID restrictions,” said ICIS senior Asia consultant John Richardson.

“There can be no short-term ‘whoosh’ like we saw in China in H2 2020, a big recovery in chemicals pricing – and more crucially spreads – until zero-COVID policies are relaxed. But China cannot afford to relax the policies for health and political reasons,” he said.

As economic conditions worsened, the Asian Development Bank (ADB) cut its GDP growth forecast for developing Asian countries to 4.6% from its previous projection of 5.2%, with China’s growth lowered by a full percentage point to 4.0%.

India’s growth was also projected to slow down, to 7.2% from 7.5% previously.

For 2023, the GDP forecast for developing Asia was lowered to 5.2% from 5.3%, it said.

Weak demand continues to drag down Asian monoethylene glycol (MEG).

Downstream polyester plants and derivatives were running at reduced rates amid the power crunch and dwindled textile demand, hence, buying sentiment turned subdued as buyers and end-users were reluctant to keep their stocks high amid slowing offtake rates.

With the yuan likely to weaken further, China’s import demand could remain weak.

Highly indicative of declining spending power in China was the March-May contraction in retail sales of clothing and textile, an MEG downstream industry.

In India, import buying interest for polyethylene (PE) black 100 pipe grade is being dampened by the weakening of the rupee, which tumbled to a record low of above Rs80 against the US dollar during the week.

This is in addition to weak buying sentiment from recent decline in domestic prices, lower prices of related polyvinyl chloride (PVC) used to make different application pipes, and heavy rains which curb downstream pipe laying works.

In South Korea, buyers in the methanol import market were cautious amid a falling Korean won, which makes imports increasingly expensive.

Meanwhile, market players in the Asian ethyl acetate (etac) market are bracing for bearish market conditions as demand takes a backseat against a backdrop of burgeoning supply.

The depreciation of Asian currencies against the US dollar, compounded by fears of a looming recession, are exerting pressure across regional petrochemical markets.

High prices despite recent pullback and weakness in regional currencies were dealing a double-whammy on petrochemical buyers in Asia.

In the week ended 15 July, the spot chemicals index in northeast Asia was down 5.8%, with paraxylene (PX) and toluene leading the decline, according to the weekly ICIS Petrochemical Index (IPEX).

Spot prices for Asian styrene butadiene rubber (SBR) have lost more than 10% between H2 June and H1 July, as buying momentum tapered with slowing demand.

A near-term demand recovery seems unlikely too, as long as downstream automotive plant operations remain sub-optimal amid lingering issues such as the persistent shortage of microchips and supply chain disruptions.

Insight article by Felicia Loo

With contributions from Hazel Goh, Melanie Wee and Pearl Bantillo

Thumbnail image: Different currencies. (Source: Shutterstock. By Ashwin)

Click here to read the Ukraine topic page, which examines the impact of the conflict on oil, gas, fertilizer and chemical markets.

Visit the ICIS Coronavirus topic page for analysis of the impact on chemical markets and links to latest news.


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