Asia Polymers: Prices fall as supplies rise but feedstock lends support

Asian polymers prices have recovered gradually over the past year after falling to a more than 10-year low in April 2020 when Covid-19 first hit commercial activity and the global economy.

Plant maintenance, production disruptions and resilient demand have continuously lifted Asian polymers prices since the start of Covid-19 pandemic. But when a gradual supply recovery and record-high polymers prices met issues of stalling demand growth, polymers prices quickly saw a downturn in this year’s second quarter.

Commodity polyethylene (PE) and polypropylene (PP) grades in early April 2021 showed an average increase of $650/t and $635/t respectively or 94pc for both grades from a year earlier. But prices of all grades fell after peaking in April 2021 as global polymers supplies normalized, while rising new production capacity continued to add pressure.

Asian LLDPE prices fall as supplies normalize

Asian PP prices fall as supplies normalize

Higher US PE and PP production occurred in April after the gradual restart of polymers plants following disruptions caused by a February winter storm. This quickly reduced Asian polymers exports to the Americas and increased supply availability for the region, which led to price falls.

Weaker polymers prices in China and subdued import demand also reduced southeast Asian exports to China and subsequently increased supplies for regional converters. A wide arbitrage led to a rapid rise in China’s PP exports to other Asian markets, in the wake of a huge expansion of China’s PP capacity since late 2020.

Southeast Asia year-to-date (YTD) April exports to China fell by 39pc against a year earlier

Southeast Asia YTD April PP exports to China fell by 29pc against a year earlier

China’s main PP export destinations in 1H 2021 

Polymer trade flows are typically dictated by supply and demand factors. But continued tightness and uncertainty in container freight availability and the resultant risk of higher freight costs pushed producers to prioritize routes with higher container availability.

The continuing freight tightness could cause delays in shipment departures from several weeks to more than a month. Producers faced risks of an upwards revision in freight costs every two weeks to a month, which indirectly reduced their sales netbacks for exports done on a cfr basis.

Asian producers reduced polymer exports to the Americas and Europe since April when prices began to soften. This left little incentive for exports to these regions after factoring in higher freight costs, trapping any supply surplus within Asia. This contributed to an uneven global market balance and trade regionalization is expected to continue for longer.

Polymer buyers worldwide also minimized long-haul imports with a price downturn and uncertain demand outlook. Freight constraints and heavy congestion at transshipment ports posed for buyers in making losses for late deliveries, putting aside expected long lead times.

Polymer freight rates treble and quadruple in nearly a year

Feedstock prices have stayed firm in this year’s second quarter despite falls in the derivative PE and PP markets. Prices of naphtha, the main feedstock used by Asian petrochemicals producers, rose gradually in the first half of this year along with a recovery in upstream crude prices. Naphtha prices were at $684/t cfr Japan in mid-July, having increased by more than $100/t since the start of April this year.

The spread between linear low-density polyethylene (LLDPE) and naphtha prices fell to $350/t in late June, down by around $270/t since early April and squeezed margins of PE producers.

Prices of monomers ethylene and propylene were also firm from April to mid-May, which directly reduced margins of producers owning standalone polymers plants. But monomers prices later fell from the end of May with expectations of rising supplies from new production capacity in China and South Korea, prior to a rebound in late June.

Asian polymers producers saw margins gradually thinned when weaker demand met higher feedstock and freight costs. This likely slowed the pace of falls in polymer prices to some extent in June when producers tried to hold prices and defend their margins.

It remains to be seen if persistently lower margins and weaker demand will lead to more producers reducing production. But most producers started raising PE and PP export offers in July because of firmer feedstock prices and slight expectations of tightening supplies for selected polymer grades with planned and unplanned maintenance.

Naphtha prices rise alongside crude futures
 

Asian PE-ethylene price spreads narrow in 2Q, squeezing PE margins 

Asian PP-propylene price spreads narrow in 2Q, squeezing PP margins

Demand for PE and PP across Asian was weak in this year’s second quarter because of a combination of several factors including need-based buying on a price downturn, peaking Covid-19 cases and supply chain disruptions.

New waves of Covid-19 in southeast Asia and south Asia led to renewed lockdowns in most countries, which affected the manufacturing and services sectors when commercial activity slowed. Downstream converters in India and southeast Asia reduced operating rates at their factories because of manpower capacity restrictions and reduced demand for finished products, which subsequently reduced demand for raw resins.

India’s manufacturing purchasing managers’ index (PMI) fell to 48.1 in June, which showed the first contraction and lowest level since July 2020. A reading above 50 indicates economic expansion. The Asean manufacturing sector contracted in June with its PMI at 49.0 in June. The Asean manufacturing PMI hit a near seven-year high in April 2021 at 51.9.

China’s limited container freight availability continued to threaten export demand for finished goods. Downstream converters in China continued to restock on as-needed basis. But it remains to be seen if seasonal demand in the third quarter will move forward with converters expecting continuing supply chain disruptions.

China manufacturing PMI

^{Source: NBS}

Asian PE and PP prices began falling in this year’s second quarter as global production issues subsided and as more new plants in China started commercial operations, increasing supplies. Overcapacity issues continued to loom in both markets, with demand expected to continue lagging supplies because of weaker economic growth during the pandemic.

China is expected to add new production capacity totaling 5.8mn t/yr of PE and 5.2mn t/yr of PP in 2021. Approximately 21pc and 44pc of the new PE and PP capacities expected in China this year have started up in the first half. South Korea, India, Malaysia and Vietnam are also expected to add new capacities totaling 4.3mn t/yr of PE and 3mn t/yr of PP by the end of 2021.

But the start-ups of some plants may slip from the projected timeline because of Covid-19 restrictions, which may slow the arrival of local or foreign manpower for plant construction and commissioning, financial issues and other factors. The delay in start-ups of some new plants has to some extent supported PE and PP prices in Asia in this year’s first half.

New PE plants in Asia expected in 2H 2021

New PP plants in Asia expected in 2H 2021

Author: Yee Ying Ang, Senior Market Reporter
Yee Ying is a Singapore-based polymers and petrochemicals reporter with a focus on southeast Asian markets.

For more information about our petrochemical services, click here.