OUTLOOK ’17: Asia MTBE may see longer supply amid China wildcard

By Trixie Yap

SINGAPORE (ICIS)–Asia’s methyl tertiary butyl ether (MTBE) market is expected to see longer supply mainly from the Middle East in 2017, with Chinese importers to continue being the demand wildcard, market participants said.

While market players expected gasoline demand in regions such as Europe, the US and Asia to be a firm supporter of MTBE prices in 2016, the market moved in a different way as consumers stockpiled gasoline on expectations of a rise in prices. As a result, the demand in both Europe and the US were lower than expected.

This led to deep-sea sellers offloading MTBE cargoes into Asia instead because of the opened arbitrage spread in most parts of the year in 2016. (please see graph below)

 

“The opening of the Europe-Asia arbitrage spread was the most unexpected of all because usually we send cargoes to Europe instead since there is better blending demand in that region,” one Singapore-based trader said.

The Europe-Asia arbitrage spread was opened for almost the entire first-half of 2016 and this caused several swing traders to redirect their Middle East-origin material into Asia instead because of the better netbacks.

Separately, the US-Asia arbitrage spread was also opened during the same period and there were cargoes of at least 15,000-20,000 tonnes of MTBE heading to Singapore, Taiwan and China. This was the second arbitrage phenomenon not seen in the past two years, market players said.

The 2016 arbitrage trade flow and evidently higher FOB Singapore and CFR China prices, in comparison to US gulf and FOB Rotterdam prices, have set the stage for sellers in 2017 to shift their focus to Asia’s import market.

Already, some of them – mainly the Middle East-based producers – have indicated their interest to maximise and increase their contractual volumes heading to Singapore or northeast Asia such as Taiwan, several market sources said.

“There is a firm interest from these producers to shift their focus from Europe or US back to Asia, just because 2016 proved that Asian importers had the strongest buying appetite,” a southeast Asia-based trader said.

While exact estimates could not be confirmed, most MTBE blenders and traders say they are expecting an increase of at least 30-40% in quantities coming from these producers.

“Even though MTBE demand has not been fantastic for most of 2016, Asia’s gasoline activity is not the worst among the lot and this has proved to be the key for more producers trying to sell cargoes there,” a Western-based trader said. 

Furthermore, with supply in markets such as the US dependent on propylene oxide (PO) margins because of swing PO/MTBE plants, there is an even higher likelihood of deep-sea cargoes adding on to the lengthening supply situation in Asia. 

“If PO margins stay healthy, of course these swing producers will maximise their production and have more MTBE since it is just a by-product,” one northeast Asia-based producer said.

To match up with this increment in supply, regional market players are hoping that Chinese import demand will be the key wildcard for 2017. Chinese buyers had exceeded all expectations for 2016, importing a total of 368,885 tonnes of MTBE, according to customs data.

An open CFR China-FOB Singapore arbitrage spread (please see graph below), workable distributor margins and better-than-expected demand in the wholesale gasoline trading market were key factors in the unexpectedly large volumes arriving at south and east China shores up to November 2016.

Therefore, market players are mostly placing their bets on Chinese demand to continue to provide support to the increasing supply fundamentals at least up to the Lunar New Year period.

Furthermore, with the implementation of Guobiao V gasoline standard in all cities and provinces together with Beijing VI gasoline standard by 1 January, hopes that Chinese import demand for MTBE have been staying afloat.

However, much of the wildcard nation’s demand for imports will rest on the supply sufficiency within its domestic market. 

Already, talks of some north Chinese producers such as Heilongjiang Anruijia restarting their 300,000 tonne/year unit after a long hiatus – following their successful procurement of raffinate feedstock from Russia – have led most market players to believe that domestic China will still see lengthening supply in 2017.

Sinopec Huntsman Jinling has also scheduled to start up its PO/MTBE swing plant, which has been delayed for at least a year, in June-July 2017. 

MTBE import demand will also be heavily dependent on the uncertain gasoline demand-supply landscape in local China, after the government delayed the issue of gasoline export quotas for Chinese independent teapot refineries for 2017.

There are heavy expectations that teapot refineries will redirect their focus to the domestic selling activities because of this, which could in turn have an impact on the amount of gasoline blending activities by private blenders.      

If Chinese demand fails to neutralise the supply rise, potentially better blending demand within southeast Asia for the first quarter of 2017 may absorb all these cargoes.

Market players are expecting some gasoline demand increase from regions such as Indonesia because of turnarounds such as Pertamina’s Balikpapan refinery in March, but Singapore-led demand for MTBE will still be heavily dependent on whether prices hit the workable blend value level.

Already, buying interest for January and February MTBE shipments has been strong because of better-than-expected gasoline blending activities, which were attributed to stronger gasoline demand from Indonesia and lower exports from India following a prolonged turnaround at a key refiner’s unit.