OUTLOOK ’18: Asia SM volatility to increase amid ADD confusion

21 December 2017 02:59 Source:ICIS News

SINGAPORE (ICIS)--Asia styrene monomer (SM) market is expected to see increased volatility over the first quarter of 2018 on the back of uncertainty over potential anti-dumping duties (ADD) to be slapped on some of the key exporters of the product to China.

The ADD has been in focus since the region’s largest importer of SM began investigations in June 2017, with the finalized result to be announced a year later, ICIS reported earlier. Preliminary results are expected in February 2018.

The ADD to be implemented by China on cargoes originating from South Korea, Taiwan and the US is making market participants brace for what could possibly be a big change in regional trade flows.

A lack of clarity over the scale of the ADD and how it will be implemented will lead to a spike in volatility in the months leading up to the final decision, market participants said.

“The ADD will have a potentially huge impact on trade flows,” said a northeast Asian trader. “There could be a lot less South Korean SM circulating in the market,” he added.

Some traders expect that if the ADD is high enough, China may import more Japanese, Middle Eastern and southeast Asian cargoes.

Most market participants were banking on a clearer idea of the ADD implementation in February, but even that was not guaranteed. Some traders were reluctant to take South Korean cargoes in January as well.

“The ADD could be applied retroactively, which will affect cargoes imported in January as well,” said another trader.

Term contract discussions for 2018 have been fettered by the lack of clarity, particularly for buyers and sellers whose cargoes are priced off a CFR (cost & freight) China basis, with stakeholders in South Korean production also holding off on discussions until the market has a clearer idea of what to expect.

Contract prices are typically settled by November and December, but many term discussions were left in limbo.

As a result, the spot market next year is likely to see an increase in liquidity as market players will not have fully covered their term requirements.

Despite the upheaval in the market caused by the impending ADD, overall supply and demand fundamentals in Asia are likely to hold steady.

Market participants shrugged off concerns of increasing production capacity in China in the near term as the bulk of the build in output will likely only take place in two to three years’ time.

China’s Qingdao Soda, for one, plans to get its 500,000 tonne/year plant up and running by the end of December. The plant was originally due to begin operations mid-2016, but has since delayed the startup multiple times.

Also expected to start up in 2018 is Anhui Hao Yuan Chemicals’s 260,000-tonne/year SM plant and Maoming Petrochemical Shihua’s SM plant in Beihai, Guangxi, with a nameplate capacity of 250,000 tonnes/year.

Zhejiang Rongsheng’s 1.2m tonne/year plant is expected to start up by the end of 2018 to early 2019.

The first quarter of the year will see a fall in arbitrage cargoes from the US.

Production in the US is expected to fall over the Q1, with several plants having scheduled their turnarounds during that period.

A number of SM plants in Europe will also be undergoing planned maintenance over the period, drawing more US cargoes to Europe.

The market is also expecting fewer cargoes to head over to the Asia Pacific as the ADD levied on cargoes from the US could potentially be very heavy, with the higher end of the range of expectations at around 50%.

Interest in cargoes loading out of the US from November has already dwindled as a result, as the move to Asia has been deemed too risky by some of the regular traders.

The fall in arbitrage cargoes will likely be offset by limited turnarounds in Asia – the overall turnaround schedule within Asia is significantly lighter than overall maintenance planned for 2017.

Meanwhile, on the demand front, downstream manufacturing plants are expected to grow at a steady pace.

Production margins have been largely positive in 2017, with market participants expecting the spread between downstream products and feedstock SM to be positive, barring any big jump in SM prices.

SM is a liquid chemical used to make resins like polystyrene (PS) and acrylonitrile-butadiene-styrene (ABS), as well as synthetic rubbers such as styrene-butadiene-rubber (SBR) and styrene-butadiene-latex (SBL).

Inventory levels in east China have been persistently low for most part of the year, leaving ample room for stock building early 2018, particularly as ADD is expected to push both imported and domestic prices higher.

ICIS China data showed that SM inventory levels have languished well below the 100,000-tonne mark since June this year.

“I am still expecting to see more buying ahead of ADD, I think it didn’t made sense to buy too early, but perhaps closer to February,” said a SM trader.

But some were of the opinion that buyers have been preparing themselves for the upcoming ADD.

“Operating rates have been quite steady despite the slow manufacturing season in Q4,” said another trader.

“I think some buyers have been stockpiling the finished product instead,” he added.

Outlook article by Deborah Lee

By Deborah Lee