Alan: Hello, and welcome back to this update to the Argus podcast series, really, where we did a pre-assessment of the market before the AFPM Conference, which begins next week, in the U.S. Clearly, a lot has changed on the 28th of February, and we really couldn't let this go without really giving an update on the key market impacts in Asia. I am happily joined by my colleague again, Toon Shien Lee from Singapore, and I will also then cover Europe, and also a little bit around the North American impacts, but clearly that should be an area of discussion at AFPM with the Argus team there. So, as I mentioned, TS, a lot did change on the 28th of February, and clearly, you know, literally a week after we did our original podcast, where we kind of discussed the short-term outlook for our regions, and the changing dynamics over a few months. So, I guess, TS, what's changed in Asia, and what has been in the impact, and how do you see this progressing if the conflict isn't resolved in the next few weeks?
TS: Hi, Alan. Thank you very much for your question. Yeah, Asia has been badly hit by the Middle East supply disruption, especially on the feedstock naphtha side. So, during the first week of the impact, we have already seen at least five crackers has declared force majeure, or FM, we called it. The supply disruption from the Middle East are so bad on the Southeast Asia crackers that the crackers just announced that, of, in a very short timing... So, our side here, we gather that, in Singapore, we have two crackers locked down, FM, and then one in South Korea, and then another one in Thailand, [inaudible 00:02:09] we also gathered one more in Indonesia. And then the following week, which is our second week after the war, we have also Taiwan, Formosa, also declared FM on their crackers' operations. So, overall, things are pretty not-looking-good for now in Asia. And because of the crackers locked down, and also shut down, we are seeing the olefins prices are surging so much. So, for instance, we have ethylene prices in the northeast Asia hitting about $1,004. And then we have butadiene in the northeast Asia hitting about $2,400 just last week. So, it was really quite an impact on the Asia side. But the price increases don't seem to be very much appreciated by the buyers. So, buyers are facing a lot of resistance. In this case, they are not really buying. And that's why our side here, we are also seeing some of the downstream buyers are starting to lock down their operation rates, because their downstream tickers couldn't really absorb the cost. Yeah. We will slowly see the impacts to have a domino effect on the downstream side, where more polymers, more PVC plants, more EVC, MEG, etc., to lock down the operation run rates because of the high prices in the monomers values.
Alan: Do you really see this potentially, therefore, impacting export volumes, TS? I mean, will Asia basically become self-sufficient, or will it actually become short, do you see?
TS: Okay. So, the interesting thing came just last week. So, what we see is that a lot of the countries, such as, like, Thailand, Singapore, South Korea, Japan, Taiwan, and also Indonesia, are loading down their crack [inaudible 00:04:19] operating rates. But there's one country that didn't really reduce their run rates that much, which is China. So, China has shown that they are very robust in this case. Mainly it's because their crackers' feedstock are very flexible. They have ethane, they have propane, they have coal to olefins. They also have methanol to olefins, which, all in all, is actually helping the country to run even higher comparing to their neighboring countries. So, in China, as of last week, their crackers' operating rate is about 90%. And because of this, the Chinese producers are starting to explore the exporting opportunities to nearby countries. So, we see that there are some exports coming out from China for ethylene, propylene, and even butadiene. Even downstream, for example, polymers, we are also seeing that China as a net importer for PE, they came out to sell more PE to Southeast Asia, and also to India last week. So, the trade flow has changed quite a bit, where China has become a major exporter during the supply crunch period. And we foresee that this will continue. But again, because China also imports quite a fair bit of crude from the Middle East, if this situation doesn't improve, we might see that Chinese producers will also go for reduction in run rates, and then the supplies of ethylene, propylene, and butadiene will also get reduced if this situation doesn't improve.
Alan: Okay. And, I mean, it's very difficult to tell, TS, but are you getting any kind of indication from the Chinese when that may be? I mean, I know they have very high inventories, but clearly, that won't last forever. Any kind of feel when this might become a problem for China, and Asia, by the sounds of it, yeah?
TS: Yeah. We don't really know, but some of these crackers' operators, and also refineries, told me that they can last until mid-April, or maybe the maximum will be until, like, May. That's the stretch. If anything goes beyond that, I think that they will have problem in securing naphtha, or even crude. And prices might get even higher during that time.
Alan: Right, okay. Okay. So, there's about another month, maybe six weeks before this becomes really a problem, then, for China, and then, by the sounds of it, Asia could become short across the entire region, yeah? Yeah.
TS: [inaudible 00:07:11] Alan.
Alan: Okay. And I think you mentioned, you know, China has a very diversified portfolio of feedstocks. I think I read that, [inaudible 00:07:20] last week, that coal-to-olefins is actually making, for the first time in a long time, positive margins, yeah, so that's a clear indication of how the world has changed, yes, I guess.
TS: Yeah, the margin is quite good. I remember clearly it's about $200 per ton now. Yeah, it's really amazing. They have been in the negative zone for very long. And then because of this, I'm hearing that some of these MTO are also contemplating to restart their plans. So, yeah, things have changed. And then, clearly, that, in this case, the MTO and also CTO are the winners. And not forgetting, of course, we have ethene cracker, because ethene crackers in China, we have a few, namely Satellite. We have SP chemical. We have Huatai Shengfu. These few crackers are not impacted by the Middle East at all, because the ethene flows are still flowing from the U.S. And prices for ethene has been steady.
Alan: Okay, Okay. Interesting, interesting. So, who would you say in Asia is actually the biggest impacted from the Middle East? Is it really Japan and Korea, or is it more, increasingly more Southeast Asia [inaudible 00:08:38]
TS: I think, overall, South Korea will be the major impact among the rest, followed by the Southeast Asia. So, I actually saw a chart from our site here, that about 37% of naphtha trade flows of the world have to pass through the Straits of Hormuz, and then among the 37%, around 80% of the naphtha are coming to Asia. So, the impact has to be very large, and that's why I think Southeast Asia, and South Korea, are the one that being hit badly. And this is very apparent, because, during the first week, we already see five crackers in both of these countries and regions to lock down their operating rates and declare FM.
Alan: Okay. Yeah, yeah. Clear. So, no, thanks, TS. A good summary. Anything else you feel is of interest from the situation, that we should maybe talk about?
TS: I think one more thing that I want to highlight is also, because we have seen some of these companies to be very resilient, not just on China base, like for example [inaudible 00:09:56] CTO, MTO. I'm talking about some of these countries, they have their own refineries, for example PTT, in Thailand, and also Malaysia's Petronas. It seems like they are still being shielded. And also we have Reliance, in India. These three companies are currently not being affected or impacted much by the situation right now. First thing first is because they have their own refineries. And secondly is, I think they also, maybe because they are more likely to have their integrated plans together, so they are not very impacted for now. But again, no one will be spared, if, let's say, this situation go for a while, because majority of them may still need to import Middle East crude to run their CDU. So, we will see how, but for now, these three are shielded from the impact.
Alan: Okay. Okay. Yeah. Okay. Cool. Okay. I think, you know, from a European perspective, would I be right in assuming, you know, that probably Europe is gonna struggle to get exports out of Asia, or certainly, if it can secure exports, it's gonna be a much higher price? Would that be a good assumption for European buyers, TS?
TS: Definitely, I think Asia will be very short, and I don't think that there will be enough supplies to the Europe for now. So, prices into the Europe should be a premium.
Alan: Okay. Now. Now, thanks, TS. Very good. And that's kind of a nice segue, then, I think into Europe, which is really a case that, you know, Europe has realized that it's got a double impact here, in terms of supply, in terms of imports in particular, directly from the Middle East. The Middle East was a significant supplier of polymers. Not feedstocks, so, not ethylene, and certainly not crude, particularly into Europe, but fundamentally, in terms of the polymers, particularly polyethylene and polypropylene. And here, we're talking mostly high-density, low-density and PP, polypropylene. Not so much on linear low. That's really coming from the U.S., so... But in addition to that, of course, which is kind of what I was picking up there with yourself, TS, really is, there's also, then, an impact on exports out of Asia. So, there are significant imports of polymers, but also of derivatives from Asia. So, the actual finished goods themselves. So, actually, Europe sees a real shortage of imports over the next few weeks, and this is really causing a little bit of a panic in the European markets, and now the real question is, can European producers ramp up?
I think, unfortunately, in the short term, that's gonna be a struggle. The reason for that, really, is economics. At the end of the day, there is no real shortage of raw material in Europe, but it is the affordability of it. And unfortunately, with the retrospective, should we say, price-setting mechanisms of the current monthly contracting prices, particularly on the crackers, they are heavily underwater in March. Basically, there was a small additional premium over their retrospective, not for adjustment for March, but it's nothing like what we've seen in terms of the real underlying naphtha increases, which, you know, [inaudible 00:13:29] day, I did a quick assessment. It's around already 230 euros up. If you look at it on the day, you're probably looking at premiums even in the 370s euros a ton higher naphtha prices. So, clearly, the crackers [inaudible 00:13:44] are losing significant amount of money for every ton they produce.
Where they're integrated, the polymer producers have been able to get some price rises. But fundamentally, now, the European market waits for full April contract negotiation price, whether this will correct. And I think, you know, we're in line to see, potentially, the biggest ever increase in contract prices in Europe. I think even greater than we saw in April '22, when the prices went up by 230 euros, roughly 230 euros a ton. I remember it well. I was working for a certain UK oil company at the time, with assets in Germany, and it was a very painful period. But I think this is potentially economically even gonna be more significant. And I wouldn't be surprised if we don't see increases even greater than the 230 for April.
But then, you know, it's really a case of how high will naphtha go? Is Europe gonna still be chasing its tail? But let's assume it does get back into some sort of balance thing. Should allow crackers to increase rates and increase local supply, which would be good news for the polymer producers, and I also assume, therefore, for the buyers. But the other issue is, as I mentioned on the previous podcast, you know, we are entering a turnaround season. Two crackers in the [inaudible 00:15:01] area have now started their turnaround, so that's obviously gonna constrain supply as well. So, this is probably gonna be a bit of a supply squeeze in Europe, certainly for the next few months. And even if economics improve, I think it could be quite a painful period for the European industry.
And of course, what we've got to work out, really, and got to be seeing, is, can the downstream afford this? And, you know, at the end of the day, will the consumer continue to buy? Will the consumer do what they did in the last cost-of-living squeeze, and start to change their buying habits, become more conservative, should we say? I think I read this morning that the World Trade Organization is already saying that GDP growth will probably reduce from the 4.6% seen globally in 2025 to, at the very best case, 1.9%, so, you know, that's basically over half a reduction in terms of growth. And again, I think that's probably a little bit on the conservative side, so it's gonna be a very interesting period.
I think the, one potential winner here, and I don't think there really are any winners in this situation, is really maybe the U.S. The U.S. is really, as, you know, as TS also mentioned, is able to supply ethane and other raw materials. They're pretty much unimpacted. Clearly, they didn't buy any crude, crude being self-sufficient, even exporting crude. So, their demand for crude exports, their demand for LPG and LNG exports, and also for ethylene, is on the increase, as are prices. So, margins in the U.S. are also increasing. And I think I read somewhere that, you know, March is already expected to be a record export month, in terms of ethylene coming to Europe. Some of that would have been planned already, to cover the shutdowns, but at the moment, I think that's the only logical supply of ethylene, really, if you want to be able to make some money. It still comes in as a discount to the contract price here. So, I think, you know, this is clearly something that we would recommend maybe you discuss with our Argus team, at AFPM, next week, is something I think it should be of great interest. I think it's gonna be a very strong period for U.S. So, we see olefins, petrochemicals. I think other petrochemicals, it may have a slightly different impact. But it's an interesting time.
I think, quick summary is, potentially, you know, Asia, it's gonna be extremely difficult if it continues. Europe, it's a bit of an opportunity maybe to increase operating rates, but can they do that economically is really the question. And [inaudible 00:17:37] clearly, is, what will consumers do? Will we create a second cost-of-living crisis, which, you know, I think most regions in the world can ill afford.
So, that really concludes today's podcast. I hope you found it interesting. We wanted to do a quick update. Clearly, the world has changed dramatically since the 28th of February. And our last podcast, you know, was fundamentally out-of-date, particularly in terms of demand and supply dynamics. And as I mentioned, you know, if you want to know anything further about this, please feel free to contact any of our team. Also, we provide regular daily, weekly, and also monthly updates to our forecasts, which will continue. And clearly, we also provide a longer-term forecast, which will also start to reflect our views of the longer-term impact of this particular situation.
I would like to thank TS for joining me again today. Much appreciated, TS. And I would just like to say thank you very much for listening, and hope you found it useful. Thank you very much. Goodbye.
