Asia SM market recovery intact into H2 as demand improves

SINGAPORE (ICIS)–Asia’s styrene monomer (SM) market appears set to continue recovering in the months ahead on the back of improved demand, after a roller-coaster ride in prices for the most of the first half of 2017.

Demand has improved in June, with a noted drawdown in inventory in the key China market from May levels. As of mid-June, SM stocks along eastern China have declined to around 100,000 tonnes amid a pick-up in buying momentum.

Consumption of downstream styrenic resins is also expected to improve the weeks ahead, when the manufacturing-for-exports season in China kicks off in the third quarter.

On 16 June, SM prices were assessed at an average of $1,145/tonne CFR (cost and freight) China, down by about 26% from the peak hit in early February, and around 9% lower from the start of the year, according to ICIS data.

The market started the year on a bullish note, riding the crest of a wave of euphoric sentiment in the aftermath of the US elections in November last year. Spot prices started to surge in January 2017 and soon reached a crescendo in early February during the Lunar New Year holidays (27 January-2 February in China).

Supply-side problems gave prices the impetus to increase. With many regional facilities due for maintenance from February to May, there was a general expectation that supply would be snug in the first half of this year.

When expectations were already widely skewed towards a very tight market, plant troubles over the US in early February fanned fears of a supply crunch.

In early February, COSMAR’s SM plant, a US joint-venture between petrochemical majors SABIC and Total, had an outage and declared a force majeure on supply.

In the same week, another major US producer America Styrenics, owned by Trinseo and Chevron Phillips, announced that its SM plant will not be able to restart post maintenance and the shutdown was likely to last one to two months.

Almost immediately, spot prices in the US surged to $1,800/tonne, surpassing Asian prices by a big margin. Spot prices in Asia spiked to the high-$1,500/tonne CFR China levels in early February, as domestic prices in the key Chinese market were lower at around $1,350/tonne.

The inability of Chinese domestic SM prices to track the increase in regional prices caused import prices to tumble from mid-February; with the downtrend lasting nearly three months.

With the huge price gap between the US and Asia SM markets, a reverse arbitrage began where Asia parcels started heading into the US. Most traders attempting this trade sought second-half February/early March cargoes and vessels, as this large arbitrage window, at least on paper, looked too good to pass. Around 25,000 tonnes of cargoes were estimated to have been shipped from South Korea to the US.

Another trade flow reversal was seen in China, where traders shipped out bonded-tank cargoes to various parts of Asia, in a bid to minimize an overhang of inventories. Stocks along the eastern shore tanks jumped to above 200,000 tonnes in February and March from below 100,000 tonnes. Traders could not sell the cargoes into the domestic market, when import prices are much higher than domestic numbers.

Consequently, in the second half of March and April, an estimated 30,000-40,000 tonnes of Chinese bonded tank cargoes were heard to have moved to various Asia markets, such as Taiwan, South Korea and southeast Asia.

SM prices in Asia continued their descent from March to mid-May despite expectations of tight supply.

The tight supply situation was barely felt in the first half as most market players, having prepared for it when the turnaround schedule was made known in 2016, kept away from the spot market.

At the same time, demand from the downstream resins sector was below expectations after the Lunar New Year holidays and could not provide much support to SM values.

When prices went under $1,000/tonne CFR China in the first half of May, there was a definitive change in perception among buyers.

A number of them stepped back into the market looking for cargoes, with prices under $1,000/tonne CFR China possibly representing a low-risk entry point for them. But before many could lay hands on SM parcels, prices took off and were soon trading at above $1,100/tonne CFR China in end-May.

Market conditions started to normalize in April and May, when the US plants resumed shipping out cargoes to Asia. America Styrenics’ SM plant restarted in April, while a plant operated by INEOS Styrolution in Texas completed its turnaround in the same month.

Most facilities in Asia have also completed their maintenance in May. Regional SM prices have held up well even with lengthening supply, which may continue into July.

In mid-June, China unexpectedly announced that it plans to start an anti-dumping investigation for SM from South Korea, Taiwan and the US.

While details regarding the start and end of the probe remain unclear, market participants were taken aback with this announcement.

With China being a net importer of SM to the tune of 3-4m tonnes a year and South Korea supplies typically selling material at above prices of domestic cargoes, some players deemed the basis of this probe as being unfounded. South Korea supplies in excess of 1m tonnes of SM to China.

Most players in Asia have adopted a cautious stance and expect limited impact of this probe on the current market. Investigations typically last for a year or more and China can still decide not to impose any duties finally, they said.

Picture: Styrene monomer (SM) is used to produce polystyrene (PS) which is in turn commonly utilised in making consumer goods. (Source: REX)

Focus article by Clive Ong