Asia ethylene rally may peak as downstream margins hit

The rally in Asia-Pacific ethylene prices may lose steam in the third quarter because of weakening downstream margins and a rise in long-haul import volumes.

Spot prices have risen to $830-850/t cfr northeast Asia, up by another $30-60/t from the end of last week to the highest since 4 February this year. The rally has now been sustained for an eighth consecutive week, with prices more than doubling from levels in the $300s/t cfr northeast Asia on 21 April.

But the gains now appearing to be nearing an end, as downstream margins begin to be squeezed.

"There is not much room to rise as only fringe downstream sectors can now afford ethylene at this level," said a key regional trader.

Margins in one key downstream sector, styrene monomer (SM), have been negative for the past month. Spot prices at $667.50/t cfr China left the ethylene-SM spread at $172.50/t today, below the $200/t level that is typically considered as the breakeven mark to cover SM production costs for non-integrated units.

China's private-sector ZPC has cut production rates to 70pc at its 1.2mn t/yr SM plant since last week. Fellow Chinese producer Shandong Yuhuang subsequently slashed rates to 80pc this week at its two SM lines, which have a total of 450,000 t/yr capacity.

Some integrated producers in the mono ethylene glycol (MEG) sector in South Korea and southeast Asia may also be reducing rates and selling ethylene instead, market participants said.

Margins are also under pressure in the largest ethylene derivative sector, polyethylene (PE). High-density PE (HDPE) spot prices are at $855/t cfr China today, with the ethylene-PE spread barely at $15/t. Non-integrated PE producers look for a spread of around $200/t to cover production costs.

But this has not affected PE production yet, as most producers are integrated units.

The spate of turnarounds in South Korea, China, Japan and Singapore that has reduced ethylene supplies through May and June may abate in the early part of third quarter.

Some maintenance is scheduled. ExxonMobil is due to shut its 1mn t/yr cracker in Singapore in July for one month. Taiwan's Formosa is also planning a shutdown at its No.3 cracker that produces 1mn t/yr of ethylene for about two months from mid-August.

But supply is expected to rise around September with the arrival of long-haul supplies that are being booked now for July loading. An estimated 50,000-60,000t of ethylene was heard booked this week, with no further details available.

And Malaysia's state-owned Petronas is now expected to resume its 1mn t/yr Pengerang cracker in the fourth quarter instead of August. South Korea's Lotte is also due to resume production at its 1mn t/yr cracker around late October, market participants said, but this could not be confirmed.

By Mahua Chakravarty and Toong Shien Lee