Margin squeeze hits some Asia petrochemical makers on naphtha, C2 spikes

SINGAPORE (ICIS)–Some petrochemical producers are hurting from a margin squeeze caused by crude-driven spikes in feedstock prices, and have resorted to cutting production as their ability to hike offers is constrained by poor demand.

Naphtha – the main feedstock for petrochemical production in Asia – has largely been tracking gains in upstream crude prices.

Recent gains in upstream markets are pinned on hopes of a global economic recovery in the second half, but these are tempered by recent spikes in coronavirus cases in both China and the US as economies re-open from pandemic-induced lockdowns.

At midday, open-specification naphtha prices for first-half August delivery were steady at $366.25/tonne CFR (cost & freight) Japan, after climbing $21/tonne the previous day.

Oil prices have retreated on Wednesday after surging 3% overnight, with Brent crude trading at above $40/bbl, while US crude stood at mid-$37/bbl levels.

Demand for naphtha is healthy for olefins and aromatics amid better margins.

For other derivative products that do not move as fast as upstream markets, margins are being squeezed.

Butadiene (BD) is currently trading at par with naphtha, which translates to losses as producers require about $100-150/tonne premium over feedstock either to break even or generate margins depending on their cost structure, operational constraints and sales strategy.

Spot BD prices were assessed on 12 June at $330-400/tonne CFR (cost & freight) NE (northeast) Asia, ICIS data showed.

Producers were holding out for buyers willing to take cargoes at $400/tonne CFR NE Asia and have turned more to those in the acrylonitrile butadiene styrene (ABS) sector amid poor demand from the synthetic rubber market.

BD consumption in major downstream synthetic rubber sector remained soft amid a slumping global automotive industry.

But BD production is unlikely to be reduced by much as ethylene and derivative polyethylene (PE) are enjoying strong margins.

BD is a by-product of ethylene production.

Ethylene prices in northeast Asia are near five-month highs on tight supply and continued to post gains at a pace that could not be matched by some derivative markets.

At midday, spot ethylene prices averaged at $822.50/tonne CFR NE Asia.

Stand-alone monoethylene glycol (MEG) producers are particularly vulnerable to margin erosion which necessitates an output cut to stem losses.

“We will cut the operation from second half of June due to eroded margins,” a northeast Asian stand-alone MEG producer said.

A separate MEG plant running at 80% of capacity is looking at issuing another 10 percentage-point cut in operating rate in July if ethylene prices remained elevated.

Based on current market conditions, selling feedstock ethylene to the spot market generates better netback.

Most MEG units in Asia, however, are part of integrated petrochemical complexes and rarely buy spot ethylene cargoes. Their margins are more tied with naphtha, whose prices have also been spiraling up.

In the polyvinyl chloride (PVC) market, producers are expected to continue grappling with high production costs in the near term given elevated ethylene prices.

Market participants, however, are optimistic that China’s stimulus measures would boost the downstream construction sector, which will mean increased PVC demand for the production of pipes and profiles, cladding, window frames, wires and cables, flooring and roofing membranes.

In the vinyl acetate monomer (VAM) market, producers have not been able to pass on high feedstock cost to end-users as demand has yet to recover since April amid lockdowns across the globe.

Supply in Asia is being augmented by deep-sea cargoes due to limited sales outlets globally, aggravating the troubles for regional producers.

“The pressure of ethylene at $800/tonne or almost doubled in past two months [caused us to] face operating issues and difficulties,” a northeast Asia-based VAM producer said.

Major producer Dairen Chemical implemented deeper output cuts at the Taiwan facilities in June.

Some VAM producers have taken to hiking prices by as much as $100/tonne to maintain a level of margins, including South Korean Lotte BP.

Sluggish demand, however, may prevent sellers from realizing the proposed price increment in full.

“Ethylene price has been increased to $815/tonne CFR NE Asia and if the price is kept high at around $800/tonne, we have to consider additional price hike announcement effective from 1 July,” a source at Lotte BP said.

VAM major Celanese on 15 June announced price hikes of $100/tonne in Asia and Chinese yuan (CNY) 700/tonne in China with effect from 1 July.

Most buyers have yet to firm up their spot VAM requirements.

End-users in South Korea increased their contractual offtakes in June after procuring only 60% of their usual monthly offtake in May, backed by improved demand from China for finished goods in the application areas of adhesives and construction.

For end-users in southeast Asia and India – which started emerging from months-long lockdowns in June – demand may not pick up immediately as they have existing inventory of feedstock, a VAM user said.

For ethyl vinyl acetate (EVA) producers in Taiwan, the margin erosion caused by spiking ethylene prices could lead to further production cuts in July.

Focus article by Pearl Bantillo

($1 = CNY7.09)

Additional reporting by Melanie Wee, Yeow Pei Lin, Helen Yan, Judith Wang, Jonathan Chou and Helen Lee

Visit the ICIS automotive topic page for analysis of the impact on chemical markets and links to latest news

Visit the ICIS construction topic page for analysis of the impact on chemical markets and links to latest news