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Asian ethylene and propylene slide into steeper backwardation on demand, oversupply

by Jennifer Lee -
  • 10/06/2021 (03:19)
Asian ethylene and propylene forward curves have stayed in backwardation for the past few weeks. Sentiment has remained bearish as demand concerns persist over the lackluster performance of downstream markets. Adding to the pricing pressure is also concern over lengthening supply in Northeast Asia, of both ethylene and propylene.

Although current supply in Northeast Asia is still tight, most of the cracker maintenance turnarounds will be completed by July. Of immediate concern for ethylene, is the start-ups of South Korean crackers from June through August.

South Korea’s GS Caltex, the second largest refiner after SKGC, is building a mixed-feed cracker with 700,000 tons/year ethylene and 350,000 tons/year propylene capacities. The cracker is expected to start up around June 2021. The producer will have an additional 200,000 tons/year of ethylene for commercial sales. LG Chemical’s third cracker at Yeosu will be operational around July-August 2021. The cracker will have 800,000 tons/year of ethylene capacity.

China being the major importer of ethylene, will be adding eight ethylene crackers in 2021, with a total capacity of 7.8 million tons. This will raise China’s ethylene capacity to around 40 million tons by the end of this year, or an estimated 23% increase from 2020.

Wanhua Chemical’s propane-fed 1 million tons/year ethylene cracker started up in late 2020. Ningbo Huatai Shengfu’s 600,000 tons/year gas cracker, which started up in the first quarter, and Gulei refinery’s 1 million tons/year naphtha cracker in Fujian, which is expected to come onstream in the third quarter - are expected to each supply around 9,000 to 10,000 tons/month of ethylene to the merchant market. Petrochemical producer Zhejiang Satellite’s 1.25 million tons/year ethane-feed cracker has started up recently.

On propylene, China’s Fujian Meide Petrochemical started up it’s new 660,000 tons/year PDH facility in Fuzhou, Fujian in early February. Oriental Energy also started up its Ningbo phase-two 600,000 tons/year PDH plant in late February, increasing its total propylene capacity to 1.86 million tons/year. The Chinese producer has two other PDH facilities, a 600,000 tons/year unit in Zhangjiagang and the 650,000 tons/year unit in Ningbo, making it China’s largest PDH operator.

Prices extend losses into 4th week

According to ChemOrbis Price Wizard, spot ethylene prices were assessed at $960/ton CFR China and $920/ton CFR Southeast Asia on June 9, down $65/ton on the week. Spot propylene prices were assessed at $1050/ton CFR China, down $25/ton on the week.

Since the downturn kicked off four weeks ago, spot ethylene prices have witnessed a cumulative decline of 17% while propylene has decreased a total of 8%.

Outlook cautious amid uncertainty over downstream markets’ recovery

Traders said that most 2H June and some 1H July business had been concluded at the lower levels of $960-990/ton CFR NEA for ethylene, and at $1070-1080/ton CFR NEA for propylene. CFR SEA cargoes were traded at a discount of $30-40/ton to NEA prices.

The weakness of downstream markets and the lack of pricing support is particularly evident from downstream PE, PP and MEG. PE prices fell for the eleventh straight week, and with LLDPE/HDPE at $1040-1130/ton CFR China/SEA, it is at negative margin for China PE producers and just breakeven for Southeast Asia PE producers.

PP prices fell to a four-month low, and with PPH raffia and film at $1100-1230/ton CFR China/SEA, it is at a negative margin for China PP and just about at positive margin for Southeast Asia PP. PPBC prices at $1180-1360/ton CFR China/SEA are still at positive margins, meanwhile.

Adding further pricing pressure was also reported aggressive short selling by some traders during this bear market. These traders were heard to have held short positions from levels of $1060-1080/ton CFR NEA and are heard to be still trading down ethylene to $960-970/ton CFR NEA.

“With the nascent arbitrage trade for ethylene from the USG to Asia ended, and arbitrage now mainly focused on USG/Mexico to Europe, there will at least be little supply pressure from the USG on either ethylene or propylene. Additionally, there will be upcoming planned cracker turnarounds in SEA between July and September. This will help to tighten supply in SEA. Hopefully when crude turns bullish again, there will be more support for naphtha and this may aid to cap the bottom on olefins prices,” said a trader.
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