OUTLOOK ’18: Supply worries, lacklustre China demand weigh on Asia MTBE

04 January 2018 06:48 Source:ICIS News

SINGAPORE (ICIS)--Deepening supply woes and overall lacklustre Chinese import demand is likely to weigh on Asia’s MTBE prices going into 2018, as market participants try to find a silver lining that will result in upward price movements.

Increasing supply availability, which has the bane of the MTBE market since 2010-2011, will continue to rear its head.

However, the focus of these new plants – for the first time in the past seven years – is likely to be outside of China.

Two new key plants – by S-Oil and FPCC – are likely to take the spotlight as they account for more than half of the expected increase capacity by the third and fourth quarter of this year (see table below).

The most troubling scenario – according to several market participants – is the likelihood of South Korea switching from a net importer to a net exporter, should S-Oil’s new plant start commercial operations within their current timeframe expectations.

“Already, we are receiving increased selling interest for contractual cargoes starting September 2018 from one of the two new start-ups,” one Singapore-based blender said.

Taiwan, meanwhile, is likely to become a clear net exporter of MTBE product – from its balanced trade position in the past three years – should FPCC’s unit start up on schedule as well.

There is an unspoken worry that all these excess supply are likely to be bound for southeast Asia – a key MTBE import region that is already receiving bountiful of cargoes from the Middle East exporters.

In 2016 and 2017, Middle Eastern product – namely from Saudi Arabia, United Arab Emirates and Qatar – took up more than 90% of Singapore import market.

Likewise for 2018, export quantities from the Middle East are unlikely to cease because these producers expect Asia demand and prices to still be more robust than Europe – even though FOB (free on board) Rotterdam prices were trading higher than FOB Singapore in most parts of 2017.

“There’s likely to be fewer unexpected outages in Europe for 2018, unlike 2017 when some plants had production woes mostly in the first three quarters,” one Singapore-based trader said.

Already, some Singapore-based blenders have confirmed that contractual volumes from the Middle East are likely to be stable for 2018.

This northeast Asia-southeast Asia trade flow expectation comes amid a closed arbitrage spread in most parts of 2017 for dutiable product into the next best import market – China – despite the closer proximity of these plants to China and better freight differentials.

In China the product from Taiwan is subject to 5.5% import duties, while product from South Korea is subject to around 3.8% import duties.

“These sellers definitely need to target southeast Asia first, because it is arguably the largest blending market still – in comparison to China,” a Singapore-based trader said.

The weaker-than-expected import buying appetite from China, in 2017, is potentially proving to be a deterring factor for these new suppliers to target the country as well for 2018.

Chinese import volumes fell short of most market players’ expectations and dropped by more than 2.5 times, comparing statistics from 2016 (457,642 tonnes) and January-October 2017 (170,737 tonnes).

This was despite a stellar performance in the first half of the year, when China imported more than 140,000 tonnes, and was almost on track to repeat the strong buying behaviour in 2016.

Ample supply in China was the sole reason for the lacklustre Chinese import demand for 2017, with the addition of more than 1.5m tonnes/year of supply in the second half, and is likely to remain as the key price driver again for the following year.

Despite all these bearish views, there is some hope in the market that there will be a silver lining – from the strong gasoline demand (and higher MTBE demand as a result) in some regions such as the Middle East – to cushion the impact of rising MTBE supply in Asia.

This is following media reports that a gasoline producing unit at ADNOC’s Ruwais complex will continue to remain shut going into the first quarter of 2018.

Furthermore, with a heavy belief among market participants that Vietnam’s new Nghi Son refinery may be postponed to an even later date in 2018, there is some hope that MTBE demand from blenders will remain stable in light of blenders needing to fulfil stable gasoline demand in southeast Asia.

“Ultimately, there is still gasoline demand to be fulfilled within the region but it will depend on whether MTBE prices will be suitable or not,” one Singapore-based blender said.

Some market positivity has already been seen from the premiums for next year’s contractual agreements, with most producers concluding them at either a rollover or slightly higher levels than 2017.

  Floating price premium for 2018 ($/tonne) Floating price premium for 2017 ($/tonne) Parties Status
FOB NE Asia FOB Singapore + 3 FOB Singapore + 3 Taiwanese producer with eight buyers Settled
CFR NE Asia FOB Singapore + 24-25 FOB Singapore + 22-24 Taiwanese buyer with two sellers Settled
FOB SE Asia FOB Singapore + 13-15 FOB Singapore + 12-15 SE Asia producer with three buyers (heard from market participants) Settled
NB: cargo is of non-dutiable origin

Outlook article by Trixie Yap

By Trixie Yap