Shaky long term prospects of polyethylene price recovery in Asia

The Chinese economy is slowing down at a time when its domestic production has greatly increased. New capacities in the Middle East, though still plagued by start-up and operating problems, have started shipments to Asia in much bigger volumes. As per ICIS, despite further moderate price rises, Asian producers are, at best, "cautiously optimistic". The cautious outlook has followed last week’s bigger price surge on temporary production issues on ethylene and derivative markets due to shutdown at Formosa Petrochemical Corp's No 1 cracker at Mailiao, and outage at ExxonMobil's 600,000 tpa PE plant in Singapore. Other short term factors could influence ethylene and PE markets over the next few months either support or make conditions worse. Spot ethylene market in Asia has, on paper, become a great deal longer because of a 150,000 tpa surplus at Shell Chemicals in Singapore, which is structurally long on C2s. Persistent problems in stabilising production of new derivatives capacity in the Middle East due to manpower shortages and the huge scale and complexity of the projects, could also lead to increased ethylene cargoes into Asia. Iran is also structurally long by about 40,000 tpa. All these factors coupled with sudden unplanned outages at derivative plants in Asia or the Middle East could result in an ethylene supply glut. On the flip side, feedstock shortages in Saudi Arabia have greatly reduced the country's merchant ethylene sales- bringing down exports from the customary 20,000-40,000 tons per month from Al-Jubail to zero. Iran's ethylene shipments can also dip very sharply when the power sector and the country's other users of natural gas leave petrochemicals short of feedstock. Spot pricing in Asia helps set what consumers pay on contract for their ethylene (term or contract sales account for well over 90% of the region's total consumption), and there are only a handful of spot deals in this region each week. Hence, a few extra cargoes can largely impact ethylene pricing. Additionally, an increasing demand for long-haul cargoes is creating repositioning problems for ethylene vessels. Lack of sufficient vessels is expected to result in higher C2 freights until the end of next year, limiting arbitrage. A wider disparity in container freight rates is benefiting the European PE industry at the cost of the Asian industry. Usually, about 30% of Middle East polyolefins move to Europe with the rest to Asia, but this has changed as more shipments move towards Asia, due to a bigger gap in rates to Europe. China's supremacy in low-end manufacturing has created additional fully occupied container space between Middle East and China. Hence the gap between freight rates on the European routes to the Middle East compared with China has widened.