OUTLOOK ’15: China’s phenol imports to slump further in 2015

By Trisha Huang

MELBOURNE (ICIS)–China’s phenol import volumes are likely to plunge further in 2015, driven by the country’s rapid capacity expansion and increasing self-sufficiency, market sources said.

Phenol imports into China, Asia’s largest market, sank by 44% to average 17,691 tonnes/month in the first 10 months of 2014, down from the 31,730 tonnes/month averaged over the same timeframe in 2013, the country’s Customs data showed.

Rising self-sufficiency is driving the year-on-year decline in Chinese import volumes, in a continuation of a trend that began in 2012.

“China’s imports will for sure drop further in 2015, it is just very difficult to accurately gauge the volume,” said a trader.

“For sure, we will see a further decrease in Chinese imports in 2015,” an Asian producer said.

Domestic phenol capacity in China, already the largest producer in Asia, is set to surge by 47% to 2.51 million tonnes by early 2015, with the start-up of new plants owned by Shanghai Sinopec Mitsui Chemicals (SSMC), CEPSA Quimica and Formosa Chemicals & Fibre Corp (FCFC).

The three plants, all located in eastern China, have a combined phenol capacity of 800,000 tonnes/year.

SSMC was heard to have started up its plant in Shanghai, which can produce 250,000 tonnes/year of phenol, in late November, according to market sources.

CEPSA Quimica expects to have on-spec output at its plant in Shanghai, which has an annual phenol capacity of 250,000 tonnes, by the second half of December, a source close to the company said earlier in December.

Taiwanese producer FCFC is aiming to start up its new plant, which will have a phenol capacity of 300,000 tonnes/year, in the first quarter of 2015.

The gain in China’s domestic phenol capacity in recent years has already brought about a dramatic change in the role played by importers who distribute material in the local market.

A Chinese importer said that, prior to 2008, 100% of its distribution business involved imported cargoes. However, by 2014, more than 80% of the phenol under its distribution is sourced from domestic producers in China.

“Whether we will still import phenol for distribution in 2015 remains a question mark,” said the distributor.

“For as long as international producers are willing to match local producers’ prices, we see opportunities to continue importing phenol. A lot will depend on international producers’ willingness to compete against Chinese producers on prices and the [Chinese] government’s tariff policies,” the distributor added.

A second distributor said: “Our imports will be fairly sporadic next year, because we plan to focus on distributing locally-produced phenol. ”

As China’s domestic capacity continues to expand, the bulk of the phenol imported into the country is now directed towards the non-dutiable, so-called bonded or re-export sectors, market participants said.

Downstream consumers in China’s bonded market segment can benefit from lower tax rates when they export the finished products made from imported raw material.

Demand in this sector, including flame retardant, polycarbonate (PC) and epoxy and phenolic resin, has been placed by market participants at 100,000-150,000 tonnes/year.

While ongoing demand for bonded material is likely to see a continuation of phenol imports into China in 2015, other factors may drive imports below the estimated 100,000-150,000 tonnes required by this market segment, market sources said.

As the length in supply builds, China-based phenol/acetone makers who import raw material benzene and propylene, including Changshu Changchun and CEPSA Quimica, are also tapping into the bonded sector, said several market sources.

This could further erode demand for imported phenol from the bonded segment to around 60,000-70,000 tonnes in 2015, the same trader said.

Import estimates by ICIS China are lower still.

China’s phenol import volume in 2015 may plummet to around 50,000 tonnes, according to ICIS China.

In comparison, the country imported 176,914 tonnes of phenol in the first 10 months of 2014, according to the Customs data.

Demand for imported phenol from the bonded market segment is also heavily contingent on a reasonable spread in prices – commonly estimated at yuan (CNY) 500-700/tonne – between the prices of non-dutiable dollar-denominated imported phenol and dutiable yuan-denominated, locally-produced phenol.

This is because a narrower price spread curtails the tariff advantage – and therefore the incentive – for bonded buyers to choose imported material.

For this reason, the prices of phenol in the bonded market tend to track the price movements of dutiable, locally-produced phenol.

“By the second half of 2015, China may stop importing phenol altogether,” said the same trader.

A logical consequence of the supply build is that exports from China will also rise, a separate trader said.

“2015 exports from China are likely to increase from 2014, although export trade is subject to logistics constraints and the availability of vessels,” the second trader said.

China’s phenol exports are already rising.

China’s phenol sales abroad averaged 2,900 tonnes in the first 10 months of 2014, compared with about 300 tonnes a month over the same period in 2013, according to the country’s Customs data.

Destinations for Chinese phenol included India, South Korea and Taiwan.

Another potential consequence of the surge in Chinese domestic capacity and the plunge in its import demand is the pressure on Asian phenol producers’ margins, the second trader said.

“Asian producers’ margins in 2015 are likely to be very weak, the price spread to benzene could drop below $200/tonne,” the second trader added.

The price spread, or phenol’s premium to benzene, is a simple industry measure of phenol makers’ profitability.

Generally speaking, a $200-250/tonne premium to benzene is sought by phenol producers in Asia.

The price spread between FOB (free on board) Korea benzene and CFR China phenol saw a dramatic narrowing to below $200/tonne in 2013 and the first half of 2014, from as wide as $500-700/tonne in 2010 and 2011, according data compiled by ICIS.

In 2012, the spread averaged at $233/tonne, ICIS data showed.

Lower Chinese imports and strained margins will discourage Asian producers from running their plants at high rates, resulting in lower regional phenol output, the second trader added.

“We could see lower plant operating rates in Asia, in particular in South Korea and Taiwan,” the second trader said.

The average phenol plant operating rate may drop to the low-80% in 2015, from about 90% in 2014, excluding scheduled plant turnarounds, the second trader added.

“2015 will be a very weak year for phenol, as supply will outstrip demand”, the second trader added.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections