Reduction in run rates at PE plants feared in Asia on negative HDPE margins

16-Dec-10
Negative production margins for film-grade high density polyethylene is fueling speculation about possible PE run cuts in Asia, as per Platts. On December 3, HDPE film production margins fell to minus US$54/mt from plus US$5/mt on December 2. The production margins had been moving into a positive territory since third week October, but sharp price increases in the Asian ethylene market since early November squeezed margins. The Asian ethylene market started climbing in November led by strong buying in China, triggered by reduced steam cracker operations amid a naphtha supply crunch that sparked spot buying from Chinese end-users. Naphtha supplies from Chinese refineries were reduced as they switched priority to production of gasoil. China's insatiable appetite for gasoil -- which began early November -- was prompted by industrial users having to use diesel generators, after local governments began cutting power supplies in line with Beijing's attempts to cut energy consumption and emissions by the end of 2010. Market sources estimated that ethylene production was cut by 10% due to the lower runs at naphtha-fed steam crackers in China. As a result, the Northeast Asian ethylene price benchmark spiked US$190/mt, or 19%, from November 1 and assessed at US$1179/mt Tuesday. In contrast, HDPE film prices only showed a $17.5/mt, or 1%, increase from November 1 and were assessed at US$1280/mt CFR Far East Asia at the start of this week. China's buying for HDPE film was not strong as most buyers remained on the sidelines on concerns that further credit tightening may curb demand for finished products. Over the weekend, the Chinese government refrained from raising rates, despite inflation concerns which hit a two-year high of 5.1% in November, well up from the previous month's 4.4% and above the government's 3% comfort zone. Instead, the government chose to raise the amount of money banks should hold in their reserves. However, the market expects a second interest rate increase early next year. So far, Asian PE producers have continued with full operating rates as they are still able to cover their losses with the fat profit for linear low density and low density polyethylene production. LLDPE production margins were pegged at plus US$42/mt Tuesday, while LDPE margins were fat at plus US$340/mt. PE production margins are calculated based on CFR FEA PE price assessments minus CFR NEA ethylene price assessments minus US$150/mt conversion costs.
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