Special Issue: Asia MLLDPE market faces potential overcapacity

As additional capacities of metallocene linear low density polyethylene (MLLDPE) are expected to come on stream globally, concerns are brewing over how this will impact the market in Asia.

Demand for MLLDPE in key Asian markets was largely subdued in the first half of 2017, as price uncertainty and relatively weak Asian currencies curbed import demand, particularly in China and southeast Asia. Non-dutiable C6 (hexane based) MLLDPE import prices in China largely rose in the first quarter, but softened from the second quarter with a $200/tonne price drop between February and June, to average at $1,210/tonne CFR (cost & freight) China on 28 June, according to ICIS data.

Similarly, average prices in southeast Asia dropped by $135/tonne from a high of $1,375/ tonne CFR SE Asia (southeast Asia) to a low of $1,240/tonne CFR SE Asia in the same period. However, lower prices failed to attract much buying interest due to bearish market conditions in the current seasonal lull for polymers.

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Typically, prices for southeast Asia cargoes are lower than that in China. However, both domestic China and import prices fell below southeast Asian prices late in the first quarter amid volatile LLDPE futures, coupled with high inventory in the domestic market, which exerted downward pressure on prices.

India’s import market initially saw prices rise in January amid improved cash flow and availability of new currency denominations. However, while most buyers were sitting on relatively low inventory, buying interest to restock was deterred by the firmer import prices. Thus, firm prices could not be sustained and prices in India saw a drop of $140/tonne to settle at an average of $1,290/ tonne CFR India, still commanding a premium of between $50-80/tonne over prices in southeast Asia and China.

The prolonged maintenance shutdown of major C6 MLLDPE producer ExxonMobil Singapore in the second quarter failed to support prices as market sentiment remained bearish. One of the reasons for the bearish sentiment was that southeast Asian converters did not see a significant increase in orders for end-products ahead of the Eid ul-Fitr holiday in June.

In the meantime, Thailand’s PTTGC commenced production of C6 MLLDPE grade at its current LLDPE plant on 28 June as scheduled for approximately 20 days. Southeast Asian converters and end-users opted to keep inventory levels lean amid concerns that prices could lose further ground, tracking the demand slowdown in the Chinese market. ICIS had rolled out C8 (octane-based) MLLDPE price assessments for Asia markets in mid-May amid growing liquidity. Prices were also in a down trend, tracking that of C4 LLDPE and C6 MLLDPE. However, due to the nature of the C8 materials, which are used in higher-end downstream applications, prices were $20-40/tonne higher than C6 MLLDPE prices across Asia.

In India, buying appetite remained thin as most buyers opted to wait for more clarity on the effects of GST (Goods and Services Tax) implementation on 1 July. There was uncertainty surrounding the new processes and system on how the 18% GST implementation would pan out, which curbed import demand. Some traders said that trade activity in the India import market will likely be subdued in the next few months as market players need time to adapt to the new processes, similar to the period after the demonetisation move back in October last year.

However, some market participants said that the current tight domestic supply for LLDPE in India might prevent prices for both C6 and C8 MLLDPE to drop much further.

CAPACITY EXPANSIONS

Market players are concerned that the global additional capacities from new projects in Asia as well as North America might depress MLLDPE prices further in the near future. In Asia alone, a total of 1.15m tonnes/year of additional capacity is expected come on stream by the end of the year, with new competition from domestic producers that did not produce MLLDPE previously. Further down the road, there is an additional 750,000 tonnes/year of capacity from Malaysia and Indonesia. For North America, there are several major producers with plants in the US that are due to start-up by the end of the year with a combined capacity of 2.2m tonnes/year.

However, some market participants understand that there might not be an immediate impact on the market. Delays in new plant start-ups are expected as it takes time for the plants to stabilise and for them to achieve on-spec production of metallocene material due to its tougher process ability.

TRADE FLOWS

Currently, the bulk of spot cargoes originate from southeast Asia, specifically Thailand and Singapore. Thailand produces both C6 (hexane-based) and C8 (octane-based) MLLDPE materials, while Singapore is a major exporter of C6 MLLDPE. South Korean and Middle Eastern spot cargoes are available sporadically as well.

Similar to PE, China is the biggest importer of MLLDPE within Asia. While China has its own MLLDPE production capabilities, market players said that these plants are in the early stages of operation and volumes remain negligible. Thus, China relies almost solely on imports to meet its MLLDPE requirements. Existing trade flows consist of spot parcels from southeast Asia to China and India, the two biggest importers of MLLDPE in Asia. South Korea also exports some volumes of C8 MLLDPE to China.

AGGRESSIVE COMPETITION AHEAD

With fresh production coming on stream, Asian market players expect aggressive pricing competition to ensue, as new producers struggle to establish a strong foothold in the rapidly growing Asian market. New trade flows are also beginning to take shape, with spot volumes from the US and Saudi Arabia gradually beginning to flow into Asia, especially China and India where domestic demand continues to outstrip import volumes. Producers in southeast Asia with new capacities slated to come on stream are expected to also focus efforts on China and India as major export destinations. Export volumes to these two countries from southeast Asia is likely to continue to grow in the coming years.

MARKET OUTLOOK

The majority of market participants remain cautious on the outlook for Asia’s MLLDPE market amid ample supply expectations and lower-than-expected demand during the year end seasonal lull. Market players said that the near-term outlook relies heavily on how the PE market fares over the coming weeks and months. Any significant recovery in demand for the more specialised MLLDPE grades will be unlikely, should demand for PE remain weak.

Manufacturing sectors across Asia have come under greater pressure. The purchasing managers’ index (PMI) in many southeast Asian economies fell in June, and the slower expansions have dented market players’ confidence in many of the developing countries in the region. Supplier inventory levels for both PE and MLLDPE resins might stay relatively high should most converters opt to keep their stock levels moderately low, curbing import demand. However, some market players are hopeful that there might be a chance for a market recovery in August or September, which is typically the peak period to prepare for year-end demand.

In the long run, spot prices of MLLDPE are likely to come under increasing pressure amid lengthening supply levels. With China set to remain a net importer in the foreseeable future, new producers are likely to focus on securing and growing market share in the country.

The Chinese commodities market is highly speculative in nature and buyers are typically price-seekers. Producers looking to actively engage with Chinese buyers are likely to tailor pricing strategies to tackle these aspects of the market. Some market players believe that this could potentially lead to a narrowing gap between commodity butane-based (C4) LLDPE and the more specialised MLLDPE grades.

Along with the lengthening supply, demand in Asia, especially China, is expected to continue to grow at a healthy rate, with the main end-user applications being agricultural film and food packaging.

While MLLDPE is known for its superior mechanical properties, not all Asian buyers have been receptive of the new technology, as it comes at a premium over traditional C4 LLDPE. Downstream production facilities of converters need to be tweaked and calibrated in order to be able to process metallocene resins. However, as buyers in the region become more aware of potential benefits to be reaped from metallocene-based stretch film, more will be willing to make the necessary upgrades to their machinery in order to accommodate metallocene resins.

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Felita Widjaja is an editor at ICIS, specialising in the Asia polyethylene (PE) market. She is responsible for the weekly Asia-Pacific PE and southeast Asian domestic PE reports, and also covers the southeast Asia and India markets for metallocene linear low density PE (MLLDPE). For enquiries, email her at felita.widjaja@icis.com

Leanne Tan is a markets reporter in the ICIS Singapore pricing team covering the Asia-Pacific and southeast Asia polypropylene (PP) and titanium dioxide (TiO2) reports. She is also the co-editor of the MLLDPE Asia-Pacific report, covering the China market. For enquiries, email her at leanne.tan@icis.com