Chinese BG buyers’ outlook remains weak amid supply overhang

Focus story by Trisha Huang

MELBOURNE (ICIS)–Chinese butyl glycol (BG) importers’ outlook remained weak because they cannot see an end to the prolonged problem of oversupply, market sources said on Wednesday.

Spot BG prices into China have declined by 4.3% since mid-February 2014, settling at an average of $1,397.50/tonne CFR (cost & freight) China for the week ended 21 May, the lowest since January 2010, according to data collated by ICIS.

A number of BG producers and Chinese importers shared the view that the China market is unlikely to see any improvement in the near term, unless there is a substantial drawdown in spot imports and existing inventories.

“The best thing we can do to help improve the situation is to reduce supply,” said a BG producer.

The market situation has remained largely unchanged in recent months.

Existing BG inventories continued to outstrip demand because of the high volume of monthly imports. A persistent BG supply overhang is limiting the upside to the yuan-denominated domestic prices in China and eroding importers’ trading margins.

China imported 12,719 tonnes of BG in April 2014, down by 21% from the same period in 2013, according to the country’s Customs data.

However, imports in March and February both saw a year-on-year increase.

China’s March 2014 import volume was a 50% year-on-year surge, while the country’s February import volume was a 14% increase from the corresponding month last year, the Customs data showed.

Even as domestic BG prices in China remained largely stable, a weaker yuan since February has effectively increased the cost of importing BG, putting further pressure on importers’ trading margins.

As a result, there has been a month-on-month decline in Chinese importers’ buying ideas for their replacement cargoes, as they seek to make a profit from distributing BG.

Bids for June cargoes were heard at $1,350-1,360/tonne CFR China on a zero antidumping duty (ADD) basis, subject to a 5.5% import duty.

“Importing BG is a loss-making business. The market situation is unlikely to improve until August, at the earliest. It’s extremely difficult for importers to increase [domestic] prices because there is no shortage of supply,” said a Chinese BG importer.

“We are still importing only because we have to ensure stable contractual supply to our downstream customers,” said a separate Chinese BG importer.

“From a feedstock cost point of view, producers’ margins are under extreme pressure. However, importers’ margins are also under a lot of pressure,” the second BG importer added.

BG was traded at yuan (CNY) 10,700-10,800/tonne ($1,712-1,728/tonne) ex-tank in east China on 28 May, largely unchanged since early April, according to data collated by ICIS.

Meanwhile, some end-users in the downstream coating sector were heard to be facing cash-flow difficulties amid the broader problem of rising bad debt in China, market sources said.

“Some of our customers seem to be facing bankruptcy, which means that overall demand is weakening,” said a third Chinese BG importer.

Amid the absence of bullish factors on the horizon, some market participants continued to hope that, as the prolonged weak market conditions prompted more producers to reduce their supply volumes to China, curtailed product availability may eventually help to boost prices.

A US producer said that it decided against offering June-loading material to China because of weak buying interest. The decision came after the same producer cut supply volumes to China for cargoes loading in March, April and May.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

($1 = CNY6.25)