OUTLOOK ‘18: Upstream volatility may be a bane for Asian PS demand

03 January 2018 01:53 Source:ICIS News

SINGAPORE (ICIS)--2017 has been a sterling year for Asian polystyrene (PS) makers, as they saw prices staying consistently higher than the same period in the year prior.

But this squeezes substantive demand and industry sources said that if the uptrend continues - supported like it had been this year by merely upstream gains - this would well also be the Achilles’ heels for PS trade liquidity in 2018.

According to ICIS data, PS peaked early in 2017, surpassing $1,600/tonne CFR (cost-and-freight) China in February for both the general purpose (GP) and high-impact (HI) grades.

There had been wide swings thereafter, which even saw prices plunged at one point in May 2017, by more than 25% from February. But overall, average 2017 CFR China prices for both GPPS and HIPS still posted a near-15% year-on-year increase.

Much, if not entirely, of these improvements had stemmed from parallel gains in the upstream styrene monomer (SM) market within the year, industry players said.

Judging from ICIS data, pricing movements of PS had indeed tracked closely those of SM, which were in themselves, as many PS makers in Asia lamented, “far too turbulent” in 2017 for their liking.

“I have no choice but to hike offers each time SM jumped up, or my own margins will bleed,” said a PS producer in Taiwan. But “it took a while”, for PS customers to catch up each time he moved offers up, the producer highlighted.

PS makers now watching anxiously how prices of feedstock SM may evolve in 2018, as they are convinced this would be a key defining factor for PS pricing trends in the coming year.

Otherwise, 2018 demand and supply outlook for PS is, according to many industry players, stable, if not flat. There are neither new applications in sight to boost downstream demand, nor potential capacity changes in the pipeline to shift supply.

In sum, there will be minimal impact on PS pricing from demand or supply factors.

PS resins are used for packaging, toys, consumer electronics, and a variety of consumer items including utensils and disposable food-ware.

Traditionally, China is a big market for PS, absorbing 600,000-700,000 tonnes annually of PS output in Asia.

But in 2017, based on data compiled by ICIS China, Chinese plants had kept up reasonably firm operating rates throughout the year, running at 60% capacity or above.

Market sources said this was remarkable considering that 2017 was a year whereby factories across China had had to grapple with frequent production disruptions arising from government regulations for environmental protection and security purposes.

But the positive domestic output level also meant that Chinese reliance on PS imports have dropped, making it even more challenging for foreign producers to find outlets in the country for their HIPS and GPPS cargoes.

A producer in Taiwan lamented that it had “become harder to sell” into China these days, despite the fact that Taiwan typically has the biggest market share of PS imports in China.

To add to PS producers’ woes, the stiff prices of PS, which came about more at the behest of SM pricing, rather than any demand/supply fundamentals for PS the product, had started to turn customers away.

Looking back at 2017, some PS market players said that there was an apparent show-down in PS off-take, compared to past years, even during Q3, which is typically when demand from China’s manufacturing-for-export sector is at its peak.

Buyers moderated their pace of purchase, as SM prices rose sharply in Q2 of the year, pulling along PS prices as well.

Now, concerns are mounting among regional PS sellers, that SM may continue to race up in 2018, under upside factors such as low port inventories in China or tightening supplies on the back of upcoming SM plant maintenance closures.

If the scenario materialises, the higher SM values will only push PS prices up further, which could in turn squeeze and slice substantive PS demand in the region even more.

Some PS end-users in Asia, including, according to market sources, several major global fast-food chains, were heard eyeing the need to turn, in 2018, to using disposable ware made from cheaper, and more stably-priced, replacement products to PS.

Potential options are polypropylene (PP) for HIPS, or polyethylene terephthalate (PET) for GPPS.  Once end-users make the switch, market participants said that this would not be easily reversible, meaning a potential and complete loss of the application for the PS sector.

Outside of Asia, PS demand and pricing are deemed still reasonably healthy in the European and American markets.

But according to an Asian producer, it is challenging to “leverage and sustain” the arbitrage, given that there is a myriad of factors - from longer and costlier freight arrangements to specification requirements - to manage.

In the Middle East, import appetite for Asian material has been dwindling due to competitive local rates by their regional supplier on a delivered basis.

Customers have generally preferred sourcing from their regional supplier because of flexible payment terms and shorter delivery times.

Only when the supplier has sold out all its cargoes would buyers consider procuring Asian material, and usually for small quantities.

With feedstock SM prices so volatile now, 'I can’t afford' to compete with the regional suppliers, some Asian PS producers lamented.

In the Gulf Cooperation Council (GCC), the introduction of the value-added tax (VAT) in 2018 will see the supply of goods and services taxed at 5%.

This could have a dampening effect on sales in the first quarter as market players make sense of the implementation.

There will be more clarity in days ahead.

Demand in south Asia is likely to remain stable-to-firm in the first quarter the 2018, according to market sources.

PS prices are expected to be firmer as well, with support from demand and SM volatility.

With three producers in India who produce both grades of PS, there is very little need to import.

Any cargoes sold to India are usually small quantities. As such, there is very limited buying appetite for Asian-origin PS material.

Outlook article by Ai Teng Lim and Yuanlin Koh

By Koh Yuanlin