Asia the main target for new PE capacities

For most of 2016, Asian polyethylene (PE) markets were generally on a stable to firm price trend with a couple of fluctuations at certain periods. A growing concern among market participants in Asia now is whether a similar price trend can be replicated in 2017 amid mounting pressure from additional global capacities.

The OPEC and non-OPEC oil-producing nations’ decision to cut oil production boosted crude prices in late 2016 and led PE suppliers to increase their offers in the Asian markets.

However, while producers raised prices based on feedstock costs, converters lamented that plastics demand in key sectors such as packaging, consumer goods and construction had been subdued throughout 2016 amid dull macroeconomic conditions. Subdued demand is expected to last through 2017.

Supply tightness amid resumed restocking activities in China after the Golden Week holiday in October 2016 had pushed prices up substantially, particularly for low density polyethylene (LDPE). Producers from Saudi Arabia, Iran and across the Middle East, from southeast Asia and India allocated more cargoes to China for better netbacks.

In addition, the arbitrage window between China and the US also opened up, leading to a sizeable volume of deep-sea cargoes being sold into China.

As China PE prices soared in Q4 2016, most market players deemed the levels too high. And they suggested that the higher prices might not be sustainable for long on concerns of additional PE supply that will be made available in 2017.

True enough, Chinese prices softened nearer to the Lunar New Year holiday, which falls at the end of January 2017, amid falling LLDPE futures prices and a slowdown in trading activity.

Although some suppliers expected the drop in PE prices in Asia to be minimised by firm regional naphtha and ethylene costs, some were worried that ample additional global polymer capacities would create supply pressure and weigh down prices in 2017.

NEW CAPACITIES

As a start, Sadara’s 1.1m tonnes/year of PE capacity (350,000 tonnes/year of LDPE and a 750,000 tonnes/year LLDPE/HDPE swing facility) had largely started up in Q4 2016. The plants will add PE supply pressure once the Sadara cracker, which is currently shut for a six week planned turnaround, restarts at the end of February or in early March.

Additional cargoes from the first wave of US shale gas projects are also expected to hit the Asian market later in the year.

About 5m tonnes/year of PE capacity, including specialty grades, from big producers such as Chevron Phillips, ExxonMobil, Dow Chemical and INEOS/Sasol is due on line in the US and Canada.

NOVA Chemicals said on 17 January that its approximately 450,000 tonne/year LLDPE unit started up in December 2016 and that the company is now shipping material to customers.

With relatively weak domestic demand in the US and Canada, these cargoes will eventually find their way to Asian markets with China being the main target market.

A major Vietnamese trader had indicated an interest in importing US PE cargoes through China and selling the polymer in southeast Asia in 2017.

In Asia alone, market participants are expecting additional PE capacities from China and India to impact the supply/demand balance.

Potentially there is 2.58m tonnes/year of additional PE capacity coming from coal-to-olefins (CTO) and traditional naphtha-based olefins/PE.

Thus, southeast Asian markets might start to see more regular import cargoes coming from China, which was not the norm previously.

CHINA, INDIA DYNAMICS

Despite the additional local PE capacities, China is still going to rely heavily on PE imports in 2017 with expected import volume of close to 10m tonnes amid an estimated demand of over 25m tonnes, according to ICIS data.

In South Asia, India-origin export PE cargoes are expected to be available in China, and potentially southeast Asia, on a regular basis in 2017.

The region’s approximately 2m tonnes/year of PE expansion plans will prompt Indian producers to export PE cargoes to other Asian regions, mainly to China and southeast Asia, as domestic demand alone will not be able to absorb the additional supply.

In the meantime, India’s import demand has been subdued following the demonetisation exercise in November which halted trade in the region as a majority of trade is typically done on a cash basis.

On the supply side, India’s ONGC 
Petro additions Limited (OPaL) is looking to start-up its two HDPE/LLDPE swing units with nameplate capacities of 360,000 tonnes/year each and a 340,000 tonnes/year stand-alone HDPE facility in the first quarter of 2017.

India’s Reliance Industries is also expected to start-up its LDPE and LLDPE/HDPE units with a combined capacity of 1.1m tonnes/year in the first half of 2017.

A regional trader said that it is considering to offer India-origin LLDPE and HDPE cargoes into southeast Asia within the year should the new commercial production start up smoothly as scheduled.

Overall demand-wise, a slow-moving consumer goods sector, and persistent weak downstream demand for finished goods in the first half of 2017 is expected to exert downward pressure on polymer prices in the region.

In the meantime, generally weak southeast Asian currencies are likely to continue to hamper imports in 2017.

However, demand could pick up after the last day of the Lunar New Year period in mid-February as converters had been keeping low inventory in the last quarter amid price market uncertainty, rendering them the need to restock, according to market sources.

As for actual demand for additional cargoes in the near future, relatively new PE export players such as India and China might face the uphill task of educating Asian buyers in their products.

There might be quality or specification issues that need to be addressed to suit the buyers’ requirements and prices need to be very attractive for them to switch suppliers, according to market sources.

Some traders said that pre-marketing activities could be the way to go and low prices would be introduced to the market which might put pressure on regular PE prices in 2017.

Additional reporting by Angie Li, Lane Kelley, Veena Pathare