Asia polymers: PP boosted by supply shortage, resilient demand

The Asian polypropylene (PP) market has remained resilient during the extended Covid-19 pandemic, with prices gradually rebounding since last year’s second quarter. It continues to be supported by firm demand for applications such as food packaging, household goods and appliances, along with medical goods such as surgical masks and protective gowns, as well as the unforeseen tightening of supplies.

China’s PP prices rose to a more than six-year high of $1,330/t cfr China on 4 March, a level not seen since December 2014. PP prices in south Asia and southeast Asia have increased since late 2020 because of regional supply disruptions. Chinese and southeast Asian PP prices showed slight downtrends in January 2021, although this changed quickly in February as global supplies tightened.

India’s PP prices rose briskly to $1,580-1,600/t cfr India with southeast Asian PP prices at $1,430-1,450/t cfr southeast Asia for dutiable cargoes on 4 March, up by 74pc and 60pc respectively from a year earlier, according to Argus data.

China's PP prices rise to six-year high as global supply tightens

^{Source: Argus Media}

The Latin story

Firmer demand and tighter supplies of PP in Latin America since early this year have turned the region into a new hot spot for international producers for PP exports and to achieve the highest sales netbacks. This has prompted Middle East and southeast Asian producers to increase exports to Latin America since earlier this year, keeping the Asian market balanced despite weaker import demand from the key Chinese market.

US PP supplies to Latin America were limited following hurricanes in late 2020. Availability will be further reduced in the coming weeks because of disruptions at US plants as a result of a winter storm in February, with Latin America losing a major import source in the short term.

The Brazilian market is under significant pressure with price hikes in February, the expectation of a further price increase in March and the possible tightening of domestic supplies. Domestic producer Braskem is expected to shut its cracker and PP plant in Sao Paulo in March for maintenance. But it was building stocks prior to the shutdowns to fulfil its commitment to customers, even though participants said they may not be enough to meet present demand. The combined factors have left PP buyers uncertain as to how they will secure access to resin supplies in March.

PP demand in Latin America is firm while supplies are scarce. Brazil’s PP producers have been struggling to meet domestic demand for food packaging, home appliances, fertilizer packaging and other sectors.

PP prices in Latin America were around $1,900/t last week for the homopolymer grade and higher for co-polymer. PP prices have risen sharply in the past three weeks on expectations of further supply shortages and the price uptrend. International producers can now achieve firm netbacks for exports to this region, even after factoring unusually high freight costs of $200-350/t.

China turns exporter

China, a net importer of around 6.5mn t/yr of PP in 2020, is now exporting it to various regions including Latin America, Turkey, south Asia and southeast Asia. China’s PP export shift began in December 2020 when Chinese domestic PP production increased with the start-up of new plants, while downstream consumption was slightly weak because of a seasonal lull. China added around 2.6mn t/yr of new PP capacity in the second half of 2020, increasing domestic availability that resulted in China’s PP prices being the lowest globally since December 2020.

Chinese converters have favoured domestic PP supplies and been cautious when restocking, dreading a slowdown in demand for finished goods because of the impact of a second global wave of Covid-19 infections in January. Chinese PP producers have offered large discounts to keep domestic inventories low as they anticipated an inevitable build-up after the lunar new year holiday in mid-February.

The strategies were effective with China’s domestic inventories at 865,000t on 25 February, two weeks after the lunar new year holiday, against 1.1mn t and 1.3mn t for the same period in 2019 and 2020, respectively. The stockbuild was only around 270,000t, much lower than the past two years of around 500,000-650,000t after the extended holiday.

China’s PP market opened strongly, with domestic PP futures rising by 7pc on the first day after the lunar new year holiday. But severe supply shortages beyond China have encouraged Chinese producers to export PP to achieve higher netbacks against domestic sales. Chinese export offers for PP raffia grade surged to $1,300-1,380/t fob China in late February against $1,100-1,150/t fob China in January.

China's PP exports soar in 1Q 2021 as arbitrage widens to global regions

^{Source: Global Trade Tracker, industry}

Asian PP prices rise by more than 50pc from a year ago

^{Source: Argus Media}

US force majeures

A massive winter storm that hit the US in mid-February forced many PP producers to declare force majeures as they shut their plants because of freezing weather and electricity shortages. Producers LyondellBasell, Ineos Olefins and Polymers, Flint Hills Resources, Total Petrochemicals and Braskem America announced force majeures following the winter storm, while ExxonMobil informed customers that it was assessing the impact of production disruptions to its PP supplies. Formosa Plastics was already operating under force majeure conditions because of earlier plant disruptions.

Approximately 7mn t/yr of PP production capacity was shut, with the majority off line for at least two weeks. Polymers producers aimed to restart operations last week but were facing several challenges, which may result in PP capacity being brought back on line on a gradual basis. Upstream gas processing plants, refineries, crackers and propane dehydrogenation (PDH) units must be restarted first to ensure feedstock availability for downstream polymers plants. Safety inspections may also slow down the start-up processes.

PP supplies in US have been tight since earlier this year because of planned and unplanned plant disruptions. The sharp increase in US PP prices and exceedingly tight supplies have offered unusual arbitrage opportunities for international PP exporters, further tightening volumes available to other regions including Asia.

US PP plant operations affected by winter storm in mid-February

Plant maintenance and disruptions

The planned and unplanned shutdown of PP plants across Asia tightened spot supplies in late February.

India’s Hindustan Petroleum-Mittal Energy joint venture shut its 440,000 t/yr PP plant in Bhatinda from late January for around 45 days because of a turnaround at its upstream refinery, which is limiting its feedstock availability.

Southeast Asia saw four producers shut or cut production at their PP plants intermittently in February because of feedstock propylene shortages and technical issues. This is reversing the balanced supply situation earlier this year when southeast Asian PP exports to the key China market and beyond Asia were reduced because of low sales netbacks and higher freight costs.

Around 1mn t/yr of Chinese PP output capacity is expected to be shut for maintenance from the end of March. But it remains to be seen if these PP producers will push back their maintenance plans because of current high prices and demand for PP, matching similar moves by some upstream PDH plant operators in China.

PP production is expected to tighten in the Middle East in March, with two producers expected to shut their PP plants, affecting 800,000 t/yr of PP capacity, for 2-3 weeks of planned maintenance. Kuwait Petrochemical Industries declared force majeure on PP on 26 February. It can produce up to 150,000 t/yr of PP.

PP plant maintenance expected in Asia in March (selected)

Middle East producers benefit

Middle East producers, which are regular exporters to Asia-Pacific, are seeing advantages when PP supplies are tight in Europe and the Americas and shipping constraints continue to limit long-haul trades. Middle East producers, given their location, now have the option to export PP to the US, Europe, South Africa and South America, which have seen a sharp increase in prices in the past few weeks following supply shortages, as well as to their frequent Asia-Pacific destinations.

Middle East producers are also expected to capitalise on their diversified export portfolio in Asia-Pacific to maximise total sales netbacks. Countries reliant on imports from the Middle East such as Turkey, Pakistan, Bangladesh, Indonesia and Vietnam are seeing prices rising as buyers scramble to find resin supplies.

Indian producers are expected to continue focusing on domestic PP sales because of seasonal high demand and continuing container shipping constraints, which may limit their exports to the rest of the Indian subcontinent.

China, which added massive new PP capacity in 2020, is seeing its export demand increase. China’s PP exports for February-March loading are expected to rise to 100,000-200,000 t/month from an average of 30,000 t/month during 2017-2020. China-origin PP cargoes are offered to various markets including Turkey, south Asia and southeast Asia.

Southeast Asian producers can now resume PP exports beyond Asia such as Latin America, Turkey and south Asia or even the US for better netbacks. Some southeast Asian producers held high inventories earlier this year because of reduced exports to China and as high freight costs limited long-haul trades.

Market turning point?

Asian PP prices have increased by an average of $260/t or 22pc from three weeks ago, which is also around 60pc higher from a year earlier, according to Argus data.

It remains to be seen if the sharp increase in PP prices across Asia over the past two weeks will destruct demand for non-essential applications such the automotive and construction sectors. But its inherent importance in the food packaging, medical and durable goods sectors, which has been further amplified during the Covid-19 pandemic, has kept demand in these sectors firm. The magnitude of buying interest for PP after the recent surge in prices will also depend on converters’ commitment to finished products and the ability to pass on the increase in resin costs to consumers.

The market turning point or easing of prices will depend on how soon global PP supplies can normalise and the start-ups of new plants expected this year.

China and South Korea are expected to add more than 2mn t/yr of new PP production capacity in this year’s first quarter, mostly in March. This includes China’s Oriental Energy 800,000 t/yr PP plant in Ningbo, South Korean firm Hanwha Total’s 400,000 t/yr PP plant and SK-Advanced-Polymirae’s 400,000 t/yr PP plant in Daesan and Ulsan respectively.

Oman’s OQ is also expected to start up its 300,000 t/yr plant in this year’s first quarter.

Malaysia’s Pengerang Refining and Petrochemical, a 50:50 joint venture between Malaysian state-owned Petronas and Saudi Arabia’s state-controlled Saudi Aramco, will delay the start-up of its refinery and petrochemical complex, which includes a 750,000 t/yr polyethylene plant and 900,000 t/yr PP plant, to the second half of 2021. The delay comes after Malaysia reinstated its movement control order in January this year because of a second wave of Covid-19 infections.

New PP plants in Asia expected by 1H 2021

Author

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

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