Will restart of LG Chem and YNCC crackers dampen bullishness in Asian olefins markets?

Asian ethylene and propylene markets have been bullish since the start of 2021, and spot prices have remained firm amid stronger crude fundamentals, as well as a bullish global outlook with regards to new vaccine availability to control the coronavirus. Optimism seems pervasive amongst market participants on the olefins markets.

The restart of LG Chemical’s Yeosu cracker and YNCC’s No 2 naphtha cracker in Yeochun this week, expected around January 18 to 20, will add a surplus capacity of nearly 2.1 million tons of ethylene back into the merchant market.

LG Chemical had shut down the Yeosu cracker on November 5, 2020, after a fire broke out. The producer’s Yeosu cracker has an ethylene nameplate capacity of 1.16ml tons/year, and there’s also another 1.04ml tons/year ethylene facility in Daesan.

YNCC’s No 2 naphtha cracker in Yeochun had been taken offline in October 2020 for two months of maintenance and expansion works. Following the expansion, the ethylene capacity will increase from the existing 580,000 tons/year to 930,000 tons/year. The producer also owns two other naphtha crackers in Yeosu, with a combined capacity of 1.325ml tons/year.

On January 18, spot ethylene prices were assessed at $,1040/ton CFR China and $990/ton CFR SEA, while propylene prices were assessed at $975/ton CFR China and $925/ton CFR SEA.

Spot ethylene and propylene prices had stayed at these firmer levels, bolstered by various purchases by Japan’s Eneos Corp (formerly known as JXTG Nippon Oil & Energy). The producer had stepped into the market to purchase ethylene and propylene spot cargoes since January 4 when their Kawasaki cracker had failed to resume operations as planned. The cracker is expected to restart in late January or early February, market sources said.

The producer bought some 4-5 ethylene cargoes at around $1,060-1090/ton CFR NEA and an estimated 5-7 propylene cargoes at around $1,040-1,050/ton CFR NEA, according to traders. Traders believe that the producer has covered its requirements and will unlikely be returning to the spot market.

“With the absence of Eneos to shore up the spot olefins markets, it’s unlikely that current high price levels can be achieved. All end users, both in China and SEA, have been sidelined by the major producer’s spot purchases. Their ethylene buy indications are at much lower levels, around the mid $900s/ton CFR NEA or in the low $900s/ton CFR SEA ranges,” said a Western trader.

As can be seen in the graph created by ChemOrbis Price Wizard, ethylene prices trended steadily upwards since December 7, and hit highs of $1,060/ton CFR China and $1,000/ton CFR SEA on January 11. Propylene prices had hit a high of $1,005/ton CFR China on December 2, before slipping slightly, to $975/ton CFR China on January 11.



A temporary price retreat?

Traders believe that the price correction following the restart of both LG Chemical’s and YNCC’s crackers may be inevitable this week, with ethylene prices likely to fall to mid-to-high $900s/ton CFR NEA, and propylene prices likely to fall even lower, below $950/ton CFR NEA.

However, the price correction looks likely to be temporary, as there are still producers and other major buyers needing to buy, like Thai PTTGC which had issued a buy tender for 3500-5000 tons of ethylene, with initial delivery dates from Jan 15-19, but likely postponed to February delivery.

There are also several Chinese buyers who would still need to import ethylene, and have been waiting on the sidelines for prices to correct. They have given bids in the mid-$900s/ton CFR for 2H February delivery.

Furthermore, higher FOB Houston prices have limited the arbitrage for ethylene cargoes into Asia for March. Traders estimate there will be around 50,000 tons of deep-sea ethylene cargoes arriving in Asia in February, while some 50,000 tons of deep-sea ethylene cargoes had arrived or will be arriving in January. These are mainly ex-USG ethylene cargoes but they believe these have been placed as they are mostly (80%) contract cargoes.

“Heading into March, with higher FOB Houston prices, there is limited arbitrage opportunity, and hardly any forward arrival discussions heard. This is a significant factor that will stem any longer term price erosion, at least for ethylene,” said a Western trader.