INSIGHT: High cost threatens Asia petrochemical output as regional currencies tumble

Pearl Bantillo

27-Sep-2022

SINGAPORE (ICIS)–Asia’s petrochemical production is at risk of shrinking further as imported raw materials get more expensive each day that Asian currencies tumble to new lows.

The sharp depreciation of regional currencies – including the Chinese yuan, Japanese yen and the South Korean won – translates to surging costs of imports despite recent declines in actual spot US dollar-denominated commodity prices of some products.

Buyers are shying away from the market, aggravating an already weakened regional demand.

For naphtha, the main feedstock for petrochemical production in Asia, spot requirements are being trimmed by end-users partly due to weakening margins for olefins.

Olefins margins had improved in early-September before easing back to unhealthy territory amid a narrower naphtha-ethylene spread, according to ICIS data.

“Due to the depreciation of the local currencies against the US dollar, buyers are mostly adopting a cautious stance and buying smaller parcels on a need-to-basis and holding back any large forward spot commitments,” a regional oleochemicals producer said.

Traders and distributors may feel the brunt of the ill effects of currency depreciation since most manufacturers keep US dollar-denominated accounts for both imports and exports, another producer said.

Importers of petrochemicals have generally adopted a cautious stance, retreating from the spot market, wary of bloating their production cost.

“We would rather wait and buy smaller lots due to the uncertainties and strengthening of the US dollar versus the local currency,” said a buyer of fatty alcohols.

This means that even when the US dollar-denominated prices of imports remain the same, importers in Asia will have to pay more due to the sharp depreciation in local currencies in the region.

“Buyers would be very cautious because now the currency is crazy. We need to pay more money when we import,” she added.

With expectations of further monetary tightening in the US, the strength of the US dollar is expected to continue throughout the year, aggravating inflationary pressures among Asian countries.

For petrochemical producers, the resulting higher cost could eventually curtail production.

“I think the US dollar [is] gonna get stronger, so I don’t want to buy a big volume – it will increase our cost,” a market player said.

In the butyl acetate (butac) market, importers are cautious as well on account of surplus inventory in parts of southeast Asia, with sentiment further weighed down by weak upstream n-butanol sector.

“[There is] no hurry to buy. [The] Thai currency [baht] is now at its weakest in 17 years, while it’s very hard to pass on higher prices, costs and other risk premiums to end-users,” said a regional-based market source.

A general demand weakness as the world is staring at another recession amid high inflation is likely to cap any significant upward movement in prices.

China – the world’s second-biggest economy and a major import market for most Asian economies – is slowing down, partly self-imposed, as it responds with lockdowns to sporadic COVID-19 outbreaks within the country in line with its strict zero-COVID policy.

“Recession [worries], depreciation of foreign exchange rates, global interest rate hikes are affecting business sentiment,” said an etac player.

Demand for ethyl acetate (etac) and butac has not improved despite firming prices of substitute product methyl ethyl ketone (MEK), the source said, citing a surplus supply in Thailand.

In the phenol market, buying sentiment in China is being dampened by increased import cost amid the weak yuan, arrival of imported cargoes and new capacity coming on stream in October.

This negates recent attempts by regional sellers to raise offers in view of recent gains in China’s domestic market.

Local prices increased last week mainly due to supply shortfalls due to a plant turnaround in Zhejiang and inclement weather-related slowdown in road transportation of cargoes in coastal areas, particularly Ningbo, Wenzhou and Zhoushan.

In early September, local phenol prices “rose due to vessel delay and stock building before [China’s] national holiday [in October], but downstream is not that good as expected,” a buyer said.

“We don’t think the current price situation will be sustainable,” the buyer added.

Expectations of fresh supply when Wanhua Chemical’s 400,000 tonne/year phenol plant starts up in October, coupled with continued weakness in demand will weigh on the regional market.

“In terms of demand, I am worried that plant operating rates will be required to be reduced due to China’s 20th National Congress. So, buyers are very cautious,” a separate buyer said.

The Communist Party of China will convene in Beijing on 16 October. The country’s political leaders meet once every five years.

In the ethylene vinyl acetate (EVA) resin space, India’s demand is being dampened by weakness in exports of finished goods to Europe and the US, offsetting any benefit of a sharp rupee depreciation.

The Indian rupee (Rs) slumped to a new all-time low against the US dollar at above Rs81 on Monday, down by nearly 10% from the start of the year.

An India-based distributor characterized the US and Europe are as “totally dead markets” for footwear, a major downstream for EVA.

“All our customers are having tough times in exports. Currency depreciation [is] affecting everyone now,” the distributor said.

Converters in the downstream footwear industry were earlier procuring raw materials on a need-to basis amid depressed prices of finished products due to stiff competition from the unorganised footwear industry in the local market.

“In normal conditions converters usually have two-three months’ of export orders but nowadays, they have not more than 15 days’ orders in hand,” the EVA distributor said.

Some of the major converters have resorted to reducing footwear prices drastically to offload stocks.

Insight article by Pearl Bantillo

With contributions from Helen Yan, Helen Lee and Melanie Wee

Thumbnail image: The strong US dollar. (By Pearl Bantillo)

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