Asia PP spreads narrow on trade, production dynamics

The price spread between homopolymer flat yarn and copolymer block polypropylene (PP) grades in Asia Pacific appears set to remain historically thin, as changing trade flows and adjustments to tariffs leave their mark.

Since Q2 2017, PP block copolymer spreads against those of homopolymer flat yarn (raffia) in both southeast (SE) Asia and China have been on a progressive decline.

PP block copolymer prices typically command premiums of $50-60/tonne on average over homopolymer flat yarn grades. But spot PP block copolymer all-origins prices in SE Asia were just $5/tonne higher than PP homopolymer flat yarn grade on 28 July. By 11 August, the spread recovered to $15/tonne. In China, PP block copolymer prices were also just $5/tonne higher than that of homopolymer flat yarn on a CFR China basis over a three consecutive week period in July 2017, marking an almost five-year low. Spreads have since recovered to $35/tonne.

Slow demand for block copolymer products in Asia weighed on prices for much of 2017 amid sluggish economic conditions. Plus, demand in China for block copolymer PP used in household appliances typically turns weak in the summer. Falling auto sales in Q2 further dampened buying appetite for high-stiffness block copolymer.

In SE Asia, weak downstream demand for finished goods during and after the Eid ul-Fitr holidays resulted in slower depletion of stocks at converter warehouses. With demand across the key export markets in the doldrums, PP producers have come under increasing pressure to cut premiums on copolymer block grades in order to improve cargo off-take.

CHINA’S OUTSIZED IMPACT

China, the largest importer of block copolymer grades in Asia, continues to have a profound impact on spot prices on a global scale. When prices in China began their gradual decline after the Lunar New Year festival, bearish sentiment rippled throughout the region. Domestic inventory levels in China ran high after the holidays on the back of weakened demand, and import prices soon tumbled.

Northeast Asian producers then moved what allocations they could to other regions. Diplomatic tensions between China and South Korea earlier in the year further hampered trade. As a result, SE Asia saw an influx of competitively priced South Korean and Taiwanese PP block copolymer cargoes late in Q2. Supply levels in SE Asia lengthened and spot prices came under pressure.

Middle East exporters of block copolymer cargoes to SE Asia face a major challenge as Indonesia discontinued the import duty exemption facilities for PP copolymer block grades in Q2. Most imports of non-ASEAN (Association of Southeast Asian Nations) origins are now subjected to import duties ranging from 5-10%, including cargoes from India and the Middle East. ASEAN countries and South Korea are among those who enjoy zero import duty.

GROWING SUPPLY LEVELS

As copolymer block products typically command a premium over commodity homopolymer flat yarn, some producers in the Middle East were drawn in by the better margins and switched to producing mainly copolymer grades in previous years.

Several ASEAN players are also manufacturing strongholds of PP block copolymer exports, including in Singapore, Thailand and Malaysia. Some have also focused production primarily on copolymer grades. Furthermore, the start-up of PP plants producing block copolymer grades in China from 2011-2013 has also diminished the country’s reliance on imports.

Supply levels are expected to lengthen further in the coming years, as more Chinese projects come on stream. India’s Reliance Industries is also adding around 180,000 tonnes/year of PP copolymer capacity to its Jamnagar site with the current start-up of its new 1.5m tonne/year cracker project.

WHAT LIES AHEAD

Despite demand showing little improvement thus far, and supply levels set to lengthen further in the coming years, the future is not all bleak for the copolymer market. Spot prices in China have begun to show signs of recovery, and market players say that South Korean producers have begun directing some allocations back to China. Offers for South Korean block copolymer exports in SE Asia have gradually become more limited, and spreads over homopolymer have widened marginally.

In the long term, demand has room to grow. Opportunities exist in relatively untapped markets such as Myanmar and Cambodia. Rising consumer spending there could propel downstream demand for household appliances and food packaging.

Producers also aim to carve a niche in more specialty block copolymer products that fetch higher premiums. This may come in the form of phthalate-free products, or those that feature high flow (MFR 70 and above) or extremely low flow (MFR 1.3 and below) properties.