By John Richardson
DEMAND remains “very weak” in China’s polyolefins markets, said a sales and marketing executive with a major Western producer.
“I am having real trouble justifying higher prices to my customers, which are partly the result of naphtha having risen in line with stronger crude. What they cannot understand is why crude should be strong when the global economy is so weak.”
We shall examine the subject of what’s driving oil prices in another post later this week. Suffice to say here that the increases have little to do with the fundamentals of demand.
Another factor behind higher olefins, and therefore polyolefins, pricing has been a temporary reduction in olefins supply, according to my ICIS colleague Peh Soo Hwee in this article.
“Ethylene and propylene spot prices in Northeast Asia had been on the rise following the 20 June power outage at Taiwanese producer Formosa Petrochemical Corp’s (FPCC) Mailiao complex,” she wrote.
“However, FPCC’s 1.2m tonne/year No 3 cracker resumed operations on 6 July while the 1.03m tonne/year No 2 cracker was back up and running on 30 June. Both plants are currently operating at full rates.
FPCC also runs a 700,000 tonne/year No 1 cracker that is undergoing scheduled maintenance from 20 June to 5 August.”
There has, as a result, been a slight improvement in polyolefins buying over the last few weeks but end-users remain extremely cautious.
“I was told by one of my customers that some 2,000 factories are expected to have to close down this year in one city alone, Guangzhou, because of the collapse in exports of finished goods to the West,” added the sales and marketing executive.
“We should get a good gauge of what the August market will be like today as two Southeast Asian producers are due to announce their offer prices for butene-grade linear low-density polyethylene (LLDPE). And then on Wednesday, Middle East producers are likely to make their announcements.”
Rather curiously, some Asian cracker operators have raised operating rates in July, or are planning to do so, on what they say are better margins.
Thailand’s Siam Cement Group, Malaysia’s Titan Chemicals and South Korea’s SK Energy are some of the producers which have upped production, according to ICIS.
But the latest ICIS Asian Ethylene and PE Weekly Margin Reports suggest that margins are on the decline.
“Ethylene margins (naphtha) in Northeast Asia plummeted by $111/tonne this week as naphtha rose by $47/tonne, increasing feedstock costs by 5.5 percent” said the ICIS Asian Ethylene Margin Report for the week ending 20 July.
“Naphtha prices have risen four weeks in a row. The margin fall was cushioned by a $15/tonne rise in ethylene prices and a 1.4 percent increase in co-product credits, mainly because of higher fuel values.”
The PE report for the same week added: “Integrated margins in Northeast Asia weakened for the third consecutive week after plunging by $128/tonne for low density PE (LDPE) and by $108/tonne for high density PE (HDPE).
“The primary reason for the margin decline was almost a $50/tonne surge in naphtha prices which increased naphtha costs by 5.5 percent to their highest since mid-May.”
This confirms that cracker operators are failing to fully pass-on higher crude and naphtha costs as a result of what remains an exceptionally weak market.
Extra supply from higher Asian cracker operator rates is hardly going to help.
And neither will volumes from the recently started-up Saudi Polymers plant that are expected to hit the market over the next few weeks.