Market Monitor | April 2019
Asia PX supply to lengthen on new capacities
Supply of paraxylene (PX) in Asia should gradually lengthen as a result of PX capacity expansion growth,driven by two large production units coming on stream in the key China market this year. Hengli Group’s PX new capacity would stand at around 4.5m tonnes/year, while Zhejiang Petrochemical Corporation will be able to produce 4m tonnes/year of PX. PX is a feedstock for purified terephthalic acid (PTA), which mainly goes into polyester fibres and polyethylene terephthalate (PET).
Around 98 per cent of PX is used for PTA or dimethyl terephthalate (DMT) production. China is the key PX demand hub globally, with the country being net-short and heavily reliant on imports. Furthermore, global demand growth is mainly driven by China, with China’s PTA production capacity standing at around 57 per cent of total global PTA production capacity.
In 2017, China imported around 14.4m tonnes of PX, while imports in 2018 from January to November stood at 14.3m tonnes. China PX imports in 2019 are expected to decline from the previous year as a result of new PX capacities being added within the country. Aside from the two mega COTC projects, Sinopec is planning to start up a new 800,000 tonne/year PX unit in the third quarter of 2019. The PX unit is located in Hainan, with mixed xylenes being its main feedstock. Towards the end of 2018, two idled PX capacities restarted due to improved PX production margins.
The PX and naphtha price differential has risen above the three-year average price since August 2018. Indonesia’s Trans Pacific Petrochemical Indotama (TPPI) restarted its 550,000 tonne/year PX unit in October 2018. The unit had been shut since May 2014. China’s Fuhaichuang Petrochemical, formerly Dragon Aromatics (Zhangzhou), also resumed PX production at one 800,000 tonne/year PX line on 25 December 2018. Its other 8,00,000 tonne/year PX line is expected to restart in January 2019. Both PX lines were shut after a massive fire in April 2015.
In the last two years, PX demand has been supported by strong growth in the key Chinese downstream PTA and polyester markets. In both years, downstream demand saw double-digit growth, compared to the more typical 6-7 per cent annual growth. A 10 per cent demand growth in China implies that 2.5m-3m tonnes/year of new PX capacity is required. However, demand growth outlook is unlikely to see more double-digit growth in 2019, amid a bearish macroeconomic environment.
PX supply in Asia will be in excess in the near term once smooth operations have been achieved at the new PX capacities. Furthermore, there are limited new downstream PTA facilities scheduled for start-up in 2019, with the majority of new PTA capacity only expected to be added in the year 2020.
However, there might be a little relief for Asian PX following the announcement of the closure of Chevron Philips Chemical’s 495,000 tonne/year PX unit located in Pascagoula, Mississippi. This might allow an increase in trade flows of Asian PX to the US.
Caprolactam sees burgeoning supply on high runs
Asia’s caprolactam prices are expected to see more weakness in 2019, pressured by rising supply amid high runs and upcoming plant expansions in China. The production output is expected to see an increase in China, as new capacities are expected to come on stream in 2019. This is expected to drive down prices, especially if facilities in China were to run at full capacity.
The caprolactam prices had declined in mid-November 2018 amid poor sales caused by weak demand for finished nylon products, mainly cold-weather apparel. The trade war saw declining caprolactam imports in China, as buyers increasingly favoured domestic suppliers, prompting local makers to increase run rates amid a shift in buying preference.
However, an unexpectedly warm winter hindered downstream nylon sales during the traditional peak months in the fourth quarter, which in turn affected caprolactam sales. The producers in domestic China struggled to offload their high inventories, which led to week-on-week lower offers, starting from mid-November. The poor demand prompted some producers to shut units in November and December, but attempts to revive spot caprolactam sales fell through as buyers were unwilling to commit to purchases amid high inventories.
Meanwhile, buyers in China are increasingly looking to the domestic market to fulfill inventory needs in view of the fluctuating US dollar-Chinese yuan exchange rates. This could mean more spot availability for major importers in Taiwan from other producers in Asia. Taiwan, which relies heavily on caprolactam imports for nylon production, was short on the material for most of the year. In addition, Chinese caprolactam producers are looking at the possibility of exporting to Taiwan, with some producers announcing flaking facilities to produce caprolactam flakes for export.
However, whether export plans materialsze remains to be seen. The Chinese caprolactum market is entirely domestic at the moment, with producers selling the product locally as high taxes make it difficult for them to export their material. China’s environmental policies are also a factor as some cyclohexanone plants remain unable to operate at full capacity due to strict emissions control.A limited supply of the intermediate could support caprolactum prices nonetheless. In the downstream sector, nylon demand is expected to remain weak for the rest of the winter months as the warm weather has dampened replenishing for winter apparel.
MEG under pressure from China economic slowdown
Asia’s monoethylene glycol (MEG) prices are expected to be weighed down in the first half by an economic slowdown in key China market, along with slower growth in downstream polyester sectors. Unfavourable macroeconomic conditions will likely lead to weakness in downstream demand growth.
Polyester demand posted double-digit growths in 2017 and 2018 as the industry expanded, but the exceptional increase in the past two years may not be sustained in the long run. The US-China trade tensions have weighed on the Chinese economy in the fourth quarter of last year, and is expected to dampen sentiment early in 2019. Any significant uptick in exports of polyester-made end-products such as clothing, upholstery and shoes, among other, may not happen without a clear resolution to the US-China trade spat.
The Chinese yuan (CNY) may weaken further against the US dollar amid the slowdown of the world’s second-biggest economy and hit China’s MEG imports. A weaker currency makes US dollar-denominated imports more expensive. Stocking up activities, meanwhile, will be curtailed by the week-long Lunar New Year holiday in China in early February. The Lunar New Year, which is celebrated in most parts of southeast and northeast Asia, is on 5 February 2019.
Global MEG supply in 2019 is expected to increase further, particularly from the second half of 2019, when huge additions are due to come on stream. In China, mega refineries with large MEG capacities are scheduled to start up during the period. Zhejiang Petrochemical will begin operations at its 7,00,000 tonne/year MEG line in Q3-Q4, along with Hengli Petrochemical’s 9,00,000 tonne/year line. The two companies operate downstream polyester plants, and the start-ups of the MEG lines will mean reduced dependence on raw material imports.
Meanwhile, production rates at coal-based MEG plants in China, though comparatively lower than ethylene-based MEG have increased in 2017 to around 45 per cent and 2018 to around 55 per cent, from below 40 per cent in 2016, as margins remained healthy. Overall production from the coal-based plants will also depend on whether or not China will continue easing down on its environmental checks in the year. Nonetheless, imports will remain as China’s dominant source of supply this year.
In 2018, 58 per cent of the country’s MEG requirements were covered by imports, down from 58.8 per cent in the previous year. New plants are also expected to start up in the US and Malaysia, augmenting the supply available to Asia in 2019.
In the US, Lotte Chemical’s 700,000 tonne/year and Sasol’s 250,000 tonne/year MEG plants are expected to come on line in the first quarter. In Malaysia, PETRONAS new 740,000 tonne/year MEG plant in Malaysia is estimated to start-up by the second quarter of 2019.
Nylon prices to stay soft on weak demand, rising supply
Asia’s nylon prices are to stay soft in the first quarter, as demand is expected to stay weak while supply is seen increasing further in the year owing to feedstock plant expansions in China. The market is not expected to improve in the near term, given the ensuing US-China trade row and upcoming Lunar New Year holidays in early February. Players typically strive to maintain lean inventories ahead of the major holiday, so spot trading is likely to remain thin until the holidays are over.
In addition, producers tend to adjust production levels lower in order to avoid an oversupply of stock. This could give a succour to the market already beset by slow demand. Players are likely to remain cautious amid the ongoing trade war, so the buying interest would be little changed after the holidays. It is par for the course for buyers to make purchases on a need-to basis, with a majority of the Chinese buyers looking to domestic suppliers on better payment terms and faster delivery, in view of the fluctuating USD-CNY exchange rates.
The nylon producers continue to strive to maintain healthy margin levels between caprolactum and nylon, adjusting nylon offers in line with movements in feedstock values. However, there are some concerns about upcoming caprolactum plant capacities in domestic China. Already, the region is experiencing an oversupply of the feedstock, and at one point, domestic Chinese prices for caprolactum and conventional grade nylon chips were at almost parity.
While this should not affect the supply of high-speed spinning nylon chips, they will face pressure if the price gap between the high-speed and conventional grade chips widens too much. This will affect Taiwanese producers as Chinese buyers make up the bulk of their export sales. Meanwhile, commitments to larger parcels are unlikely to materialise in the near future, with purchases expected to remain on an as-needed basis, especially if demand for finished products were to remain weak. The Asian nylon market has been bearish since the end of last year because of falling demand and a mild winter. The clement temperatures had led to reduced demand for finished nylon products, contributing to the current downtrend in values. In addition, the US-China trade wars have been weighing on market sentiment in the region, with main buyers in China reducing order quantities from major suppliers in Taiwan. The poor US dollar-CNY exchange rate has also resulted in an increasing number of buyers turning to the domestic market to fulfill inventory needs.
PET sees supply-demand balance, market calmness
Asia’s polyethylene terephthalate (PET) market is expecting to be balanced in supply and demand next year, and margins are likely to be within range following a tumultuous 2018. Some buyers have already approached Chinese sellers for cargoes slated for delivery in the first half of 2019, with some transactions done.
With semi-term cargoes secured, panic buying that happened in 2018 is not expected to repeat itself. Seasonal peak demand will rise at the end of March. During this period, downstream pre-form converters start to prepare for the next summer peak bottled beverages consumption. PET suppliers tend to run their plants at full throttle, leading up to the peak demand season. Supply is not seen an issue as most plants would have wrapped up maintenance works by the end of 2018 or January 2019.
China Resources Packaging has an ongoing plant maintenance affecting 600,000 tonnes/year of its production. During the turnaround, the plant will undergo a change in its energy source from coal to gas and the maintenance is expected to complete in end-January. A Taiwanese producer has planned maintenance from mid-December 2018 to mid-January 2019. Oman’s Octal Holding will be having a three-week turnaround in January at one of its four lines, with a combined capacity of 850,000 tonnes/year.
In Asia, there are a few new plants coming on-stream by Yisheng Petrochemical and Zhejiang Wankai New Materials in 2019-2020. Only one 600,000 tonnes/year capacity is slated to start up in mid-2019, while others plan to start up in late 2019 and 2020. Hence supply is seen stable.
The PET prices will stick to tracking production cost in 2019 after the market stabilised in the fourth quarter. In April this year, PET prices had detracted from following feedstock price trends. Then PET producers saw good margins, broadly driven by tight global supply. There were several outages in the US, Europe and Asia that coincided with the peak demand season.
The PET spread subsequently narrowed sharply in August-September, as plants restarted and demand slowed. One recent change that impacted PET FOB China prices was the increase in tax rebate of China PET exports. Chinese PET producers have the flexibility of basing their prices on local feedstock cost and not import valuation, after factoring in export rebate from the use of domestic feedstock.
Meanwhile, in China, with recent rebounds in feedstock purified terephthalic acid (PTA), the price gap between the local PTA after rebate and PTA import narrowed. Similarly, the price spread between China and other Asian PET offers was narrower. Such price relationships will be keenly monitored going forward.
The market also awaits the outcome after the US PET producers’ appealed to the International Trade Commission’s (ITC). The anti-dumping investigation on PET resin imports from Brazil, Indonesia, Korea, Pakistan and Taiwan may curb US buying interest.
PTA supply balanced to tight amid growing demand
Asia’s purified terephthalic acid (PTA) supply is likely to remain largely balanced to tight in 2019 as a result of limited capacity expansion, while demand is expected to continue growing. China will remain the key demand growth driver for Asia, followed by India. The expected demand growth for China is at around 6-7 per cent, tracking the country’s expected GDP growth, representing a slowdown from the double-digit growths posted in the past two years.
Uncertainties in the global macroeconomic environment, generated by the ongoing US-China trade war, could cap PTA demand growth. China’s PTA consumption increased by 2.4m-2.8m tonnes in 2018 to around 40m tonnes. Within Asia, supply of PTA is expected to be tighter in 2019 amid increasing demand, as majority of new capacities will only come on stream toward the end of the year.
Majority of upcoming PTA expansions are in China, with the bulk of effective capacities coming on line in 2020. There are new PTA capacities being added this year amid expansions in the feedstock paraxylene (PX) sector. No new PTA capacity came stream in Asia in 2018. PTA margins should remain relatively healthy for the year, spurred by balanced to tight PTA supply demand, on the backdrop of ample feedstock availability.
In 2018, the PX and PTA spread for US-dollar denominated cargoes stood at around an average of $158/tonne, while the spread for China yuan (CNY) cargoes stood at an average of $134/tonne. With the expectation of a healthy market fundamentals this year, the PX and PTA spread for both US-dollar denominated cargoes and CNY cargoes are expected to be within the range of $140-160/tonne, much higher than the breakeven level of around $85/tonne.
PTA inventories in key China begin the year at a low, with the China PTA futures warehouse receipted cargoes at the lowest level compared to the last two years. Majority of market players are keeping their inventories low, wary of incurring losses amid the global macroeconomic uncertainties.
China’s polyester average operating rates in 2018 stood at around 82 per cent, compared to 79.4 per cent in the previous year, according to ICIS data. Going into 2019, Chinese polyester average operating rates are expected to be maintained within the 80-85% range. PTA operating rates in Asia are likely to be very margin sensitive, especially in the key China market.
Historically, producers tend to shut their plants when margins are negative for a sustained period of at least two to three months. In 2018, the average operating rates of PTA facilities in the key China market stood at around 78 per cent, up from an average of 65.8 per cent in the previous year. Yuan-denominated PTA cargoes are likely to continue to closely track price movement in the futures market, which is sensitive to global macroeconomic trends, as well as fiscal and monetary policies in China.
PE market faces further downward pressure on oversupply
Southeast Asia polyethylene (PE) market is likely to face some downward pressure in 2019 on oversupply as demand could not catch up with the large capacity additions. Import PE supply is expected to swell amid another round of new PE plants start-ups, creating more options for converters while suppressing prices in return, industry, sources said.
The first wave of shale gas projects in the US and PE expansions in India had added around 6m tonnes of PE capacity from 2017 to 2018 with linear low density polyethylene (LLDPE) being the most volume added, followed by high density polyethylene (HDPE) and low density polyethylene (LDPE) grades.
In the first half of 2018, both domestic and import prices saw some gains across all PE grades, with dutiable HDPE prices surging above $1,400/tonne CFR SE Asia on average in March, a price level last seen in 2015. Prices were supported by tight supply situation amid limited production and commercial shutdowns, stemming from much higher feedstock ethylene price and robust demand in PE pipe market. Regional PE producers with integrated plants switch to selling their ethylene when prices are high for better netback, lowering their PE production.
The surge in demand for HDPE pipe, amid growth in the construction sector in Asia, has given more incentive for HDPE producers to switch their production to pipe instead of film grade, tightening the latter supply in the process. In the second half of the year, PE prices moved away from their respective peaks and steadily declined month-on-month, with LLDPE film grade performing the worst. Dutiable LLDPE prices reached a 9-year low at $1,000/ tonne CFR SE Asia on average, as of mid-December 2018, amid mounting supply pressure.
India is exporting heavily to South-east Asia after it turned into a net exporter in 2018, with the region making close to 20 per cent of its total export volumes in 2018. An additional 25% tariffs, imposed on 23 August, for most US import PE cargoes in China had rendered US cargoes unappealing to Chinese buyers, effectively closing the prime import destination to US producers. As a large chunk of export volume from the new US PE plants that came online in 2017 and 2018 were initially meant for China, US suppliers need to find many other markets to sell to, to bridge the gap.
In order to gain foothold and market share in Asia, US suppliers were inclined to offer competitive prices, particularly for LLDPE grade, should the US-China trade tension continues throughout 2019. Offers for US LLDPE cargoes were readily available below $1,000/tonne CFR SEA, largely at $950-980/tonne CFR SEA, around $50/tonne lower than other offers available from regular Saudi and Middle East suppliers. The supply glut looks set to intensify in 2019 as more PE producers are on track to start up their plants, adding close to 7 million tonnes of additional PE supply globally.
On 21 December, dutiable LLDPE film prices were assessed at $1,100-1,020/tonne CFR SE Asia, up $20/ tonne from the week before amid a lack of competitively priced offers, according to ICIS data. Dutiable HDPE film prices were assessed stable-to-soft at $1,030-1,050/tonne CFR SE Asia, while dutiable LDPE film prices were stable week-on-week at $1,020-1,030/tonne CFR SE Asia, ICIS data showed.
Demand growth for PE, including LDPE grade, in most Asian markets is expected to be slower in 2019, in tandem with the global economic slowdown, uncertainty surrounding the geopolitical market and rising environmental concerns on plastic waste. There is relatively limited supply pressure for non-dutiable ASEAN (Association of Southeast Asian Nations) cargoes as the bulk of additional supply were for dutiable cargoes. This might act as a catalyst to widen the price gap between dutiable and non-dutiable cargoes further in 2019.
On the demand side, most buyers in Southeast Asia have largely been weighed by bearish market sentiment, which might continue to manifest in 2019 amid tilted supply-demand balance. Most converters opt to rely on more prompt shipment imports for their immediate requirements amid market uncertainty.
Similarly, traders and stockists are cautious to take any position, opting to hold on to minimally comfortable allocations and stock levels amid market uncertainty. Industry sources see Vietnam becoming a more targeted exports market in Asia, apart from China, in the foreseeable future.
Vietnam market has been inundated with competitively priced import cargoes from India and the US due to its full reliance on imports and zero import duty policy while other Southeast Asian countries impose between 5-15 per cent of import duty for non-ASEAN PE cargoes. Prices in Vietnam could be significantly lower than other southeast Asian regions, which might isolate price movements in Vietnam from the rest of southeast Asia, warranting separate price assessments, sources said. Overall outlook for 2019 remains cautious with some risk of further downtrend across PE grades while some market players believe that LLDPE prices had reached the bottom.
PP to be weighed down by new start-ups
Polypropylene (PP) spot prices in Southeast Asia may continue to be suppressed moving into the first quarter of 2019 as the market continues to grapple with fresh supplies and tepid downstream demand amid global trade tensions. The Year 2018 started on a bullish note, with all-origins PP flat yarn grade prices peaking for the year at $1,305/tonne CFR (cost and freight) southeast (SE) Asia in early June, a close to 10 per cent increase from January, according to ICIS data.
For the first three quarters of 2018, spot prices stayed consistently higher than the same period in the year prior, with all-origins spot prices mostly staying over the $1,250/tonne CFR SE Asia mark; supported by healthy import buying appetite and lower than anticipated inventory levels in China. Some unexpected turnarounds in the Middle East and parallel gains in the upstream propylene market further propelled regional PP spot prices.
However, sentiment took a dramatic turn for the worse in the last quarter, with spot prices plunging by more than 13 per cent within the short span of seven weeks. Trade tensions between US and China stoked volatility in the petrochemical markets in the later part of 2018, and the PP market was not spared. For most of Q4, demand in Southeast Asia was in the doldrums. Converters and end-users in Southeast Asia were making procurements on a hand-to-mouth basis, opting to keep stocks lean amid concerns that spot prices may lose further ground in the weeks ahead. Meanwhile, the market continues to grapple with fresh supply, with the start-up of Nghi Son Refinery and Petrochemical’s (NSRP) 400,000 tonne/year production unit in Vietnam and Lotte Chemical Titan’s 200,000 tonne/year facility in Malaysia.
Availability of duty-exempted ASEAN origin cargoes in particular has lengthened considerably as a result, resulting in a narrower price gap between dutiable and non-dutiable PP cargoes in SE Asia; a trend that is likely to continue well into 2019. The scheduled mid-2019 start-up of the Refinery and Petrochemical Integrated Development (RAPID) project in Malaysia’s southern state of Johor is expected to add a further 900,000 tonnes/year of PP capacity in the region.
With the start-up of the new unit, Malaysia is expected to become a net PP exporter with a total production capacity of 1.54m tonnes/year by 2020, putting a massive dent on its demand for imports.
In Thailand, some local traders harboured concerns over political uncertainties surrounding the upcoming general election after four years of military rule which could have possible implications on the country’s economy. The local market in Vietnam continues to struggle to achieve a new equilibrium with the start-up of NSRP’s new PP production unit. The producer’s main focus thus far has been on commodity homopolymer grades, leading to a reduced dependency on imports for commodity grades in the country.
In particular, Vietnam has seen very limited imports of Chinese origin PP cargoes. Initially, there were expectations that new capacities in China may result in Chinese suppliers seeking to export more volumes to Vietnam. However, NSRP’s start-up has led to increased pricecompetition between locally-produced materials and imports within Vietnam, as new market players struggle to establish market share in the country.
Meanwhile, Indonesia is expected to see growing volumes of South Korean origin exports in 2019, in particular for copolymer grades; for which South Korean exporters enjoy duty-free status in Indonesia. Throughout the past year, Indonesia has seen competitively-priced South Korean copolymer exports being offered in the country, exerting increasing pressure on ASEAN producers, whose cargoes are similarly exempt from duties in Indonesia.
While there are concerns that the increased availability may lead to an eroded price gap between dutiable and non-dutiable copolymer prices, it is worth noting that the bulk of PP start-ups in China and southeast Asia have thus far been focused on mainly homopolymer grades. Hence, some market players are hopeful that spreads between homopolymer and copolymer grades could be maintained, at least in the near term.