Asia PP market likely to remain under pressure in H2 2017

22 June 2017 05:00 Source:ICIS News

SINGAPORE (ICIS)--The Asian polypropylene (PP) market is likely to remain under pressure in the second half of 2017 as buying in the key Chinese market is showing no signs of picking up after months of slow import activity, according to market sources.

The Asian PP market saw a bullish start in early 2017, with PP flat yarn grade prices in China peaking for the year at $1,055 CFR (cost & freight) China in early March.

Dutiable PP flat yarn grade import prices in southeast Asia similarly reached a 19-month high of $1,150 CFR southeast (SE) Asia on average in late February, owing to a tight availability of spot supply amid several unscheduled turnarounds at producers in the Middle East.

Producers raised list prices substantially week after week in the first quarter of 2017, keen to take full advantage of the short supply. The bullish momentum was further fuelled by escalations in feedstock propylene spot prices in SE Asia.

However, the uptrend lost momentum in early March, as Chinese buying appetite failed to pick up after the Lunar New Year holidays, defying expectation.

Demand in China has been weak for most of the year as downstream converters ran their manufacturing plants at reduced capacity amid stricter enforcement of environmental regulations aimed at curbing pollution.

A post-holiday build-up of domestic inventories in China further dampened buying appetite for fresh import cargoes from the Middle East in Q2 2017.

Chinese traders with incoming cargoes turned to SE Asian buyers in search of more attractive margins amid a growing gap between China and SE Asia prices.

Spot import prices in SE Asia in turn came under pressure, with supply in the region augmented by re-exports of Middle East cargoes by these Chinese traders amid the open arbitrage window.

Producers in Taiwan and South Korea also redirected available spot cargoes away from their typical China target market to SE Asia instead, attracted by the better netback.

Toward the end of Q2 2017, international producers faced stiff competition from local producers in the domestic markets, in both China and SE Asia, resulting in limited support for PP prices in Asia.

The outlook for the rest of 2017 will hinge largely on buying appetite and inventory levels in the key Chinese market.

Should downstream demand for PP resins in China remain persistently weak, domestic inventory levels will likely continue to run high, and interest in imports will remain subdued as a result.

This in turn will likely impact buying appetite in the broader Asian market in the near term.

Volatile crude oil prices, political tensions and with weak macroeconomic fundamentals could also continue to plague the Asian market through the second half of the year.

Moreover, manufacturing sectors across Asia have come under greater pressure in recent months.
The purchasing managers' index (PMI) in China and many SE Asian economies fell for the month of May, and the slower expansions have dented market players’ confidence in many of the developing countries in the region.

The outlook for July remains bearish, with some market players anticipating that demand for fresh imports to be dented by potential delays in previous’ months cargoes.

Port congestion in the Middle East is a typical occurrence for the industry near to the Eid holidays, and as a result, some cargoes originally scheduled to arrive in June or July could potentially be delayed to later months. 

Further down the road, some market players were hopeful for a slight pick-up in downstream demand in August and September when post-Eid and the start of year-end buying commences.

However, buying appetite in Asia is likely to fade once again toward the end of the year, as the New Year holidays approaches.

Picture: Polypropylene is used to make transparent food packaging. (PhotoAlto/REX/Shutterstock)

Focus article by Leanne Tan

By Leanne Tan