China petrochemicals recovering but at risk amid coronavirus spread and crude price falls

Petrotahlil - Supply and demand balances in China’s petrochemical industry are recovering following the reopening of domestic factories from mid-February.

But ICIS does not expect a ‘V’ shaped trend in China following that, as market fundamentals in globalised markets are hit by the wider spread of the coronavirus.

Fears of an oil price war are also expected to weigh on chemical prices in a changeable situation.

• Orderly ramp up of demand in China expected to accelerate from the second half of March
• Finished products exports at a risk. Domestic demand more critical for China in 2020
• Frequent and rapid price fluctuations expected in China considering disruption caused by the crude price crash

CRUDE CRASH DISRUPTED PETROCHEMICAL FUNDAMENTALS
Crude oil prices slumped amid the price war and following weaker oil demand expectations due to the coronavirus spread around the world.

On 12 March the World Health Organization (WHO) officially declared the spread of the Covid -19 coronavirus a pandemic.

ICIS expects additional pressure on petrochemicals in an already-challenged market.

In northeast Asia, this should offset the impact from the fire at Lotte Chemical’s cracker facility in the short term.

A fire and explosion at Lotte Chemical’s naphtha cracker in Daesan, South Korea on 4 March forced the shutdown of the plant and some downstream units.

The futures market fell sharply in the week, weighing on sentiment in the spot market.

Market participants are becoming more risk averse in China. Traders with cargoes-in-hand want to reduce inventories, which is expected to drag down prices in the short term.

Buyers are holding back on purchases as they expect prices to fall further given the recent crude oil price slump and ample supply. It is difficult to have batch, bottom-hunting behaviour given that chemicals prices have fallen to historical lows. Market participants are getting used to a situation they have not experienced before.

Prices for major upstream petrochemicals fell sharply following the oil slump providing more room for price declines in an oversupplied market.

ICIS analysts expect the impact from lower priced crude oil to be clearer in April and May as psychological reaction to the crude fall gives way to the more substantial influence on cracker operating rates.

Margin of ethylene cracking in northeast Asia

Cracker margins in northeast Asia have increased rapidly reaching $180/tonne on 6 March. Now, the prospect of stronger profits but rising inventories puts operators in a dilemma.

An increase in cracker operating rates is possible considering the increased margins. However, further increase is dampened by inventory gluts for polyolefins, styrene, mono ethylene glycol (MEG) and more.

Cracker operating rates might return to normal levels if inventory problems are solved in April.

Some crackers in China had lowered the operating rates to 80-90% from full rate in February. Rates have been lifted in March to 85-95%.

Combined with the crude oil slump, the coronavirus spread and petrochemicals capacity expansion, the market turmoil is expected to be sustained for some time, during which there may be frequent and rapid price fluctuations.

Into April, the market may have opportunities to rebound after inventory declines in China and with the brewing Lotte Chemical event, according to the latest ICIS price forecasts.

The market rhythm in China in the short term, however, will be dominated by factories getting back to work and inventories changing.

CHEMICAL PRODUCTION IN CHINA NOT YET BACK TO NORMAL
The coronavirus outbreak affected factory operations in February, which radiated to raw material suppliers and, alongside logistics difficulties, resulted in output cuts in the petrochemical industry.

Acrylonitrile butadiene styrene (ABS) is a typical example. About 65% of downstream ABS plants had cut operating rates or delayed restarts in February.

But rate increases now are dampened by inventory gluts.

Petroleum product inventories have remained high. As of the week to 6 March, the loading of local refineries in Shandong was still below 50%, while that of the major refineries was 66%.

“We might raise the operating rate in the second half of March, but it will not be a big increase,” one major refinery producer in China said.

Chemical products are faced with similar situations. Although downstream factories resumed operations from mid-February, the pace was slow due to a lack of workers and strict requirements for reopening.

Labour shortages and logistics constraints have improved significantly in China, nevertheless. Factory operations are expected to speed up from the second half of March.

However, this is not likely to be enough to trigger a decrease of inventories for most petrochemicals in March.

On 13 March, China’s major local producers’ plastic resin inventory stood at 1.25m tonnes, down from high record at 1.6m in February.

“It’s a periodical inventory shift to traders and users rather than a real demand pick-up,” ICIS senior analyst Amy Yu said.

“The current level is still much higher the normal, which is around 0.8m tonnes. We expect one to two months for it to be decreased. The slumping price of oil might slow down the progress.”

Disruption caused by the coronavirus outbreak had a much more significant effect on more downstream products of the petrochemical industry, like polymers and synthetic rubbers.

In the polyvinyl chloride (PVC) sector, the overall operating rate has increased to 75%, but is still 5 percentage points lower than a year ago.

“We expect the Chinese PVC market to be balanced to long in March with lengthening supply and poor demand from downstream processing facilities. The inventory level is expected to hit a high in late March or early April, potentially higher than last year,” said ICIS analyst Lina Xu.

ICIS estimates an inventory build-up of more than 20,000 tonnes in styrene butadiene rubber (SBR) in China in February, and an additional build-up of less than 5,000 tonne inventory due to healthy margins.

The liquid chemical products are much less stressed.

The supply demand balance in the butadiene sector is expected to improve to a domestic deficit 12,000-18,000 tonnes in March.

East China ports benzene inventory was 77,900 tonnes on 6 March, down 12.7% from the end of January and 64.7% from the same period last year.

However, downstream inventories remain as critical to sustainability.

China is expected to have a 46,000 tonnes benzene surplus in March because several downstream products, for example, styrene, are still under pressure, said ICIS senior analyst Jenny Yi.

New capacities are another problem for the Chinese market.

We expect a lengthening of styrene supply due to more supply from the new plants Hengli Petrochemical and Zhejiang Petrochemical as well as high inventory in the ports,” said ICIS analyst Jimmy Zhang.

In the methanol sector, domestic weakness is expected to persist through March and April with a surplus of 360,000 tonnes, said ICIS senior analyst Rachel Qian.

Wider destocking activity is not expected to start until April, following a complete recovery of factory operations.

“We expect a methanol deficit balance of 170,000 tonnes in May after economic activity recovers,” Qian added.

As the core area of the epidemic, Hubei's resumption of work officially started on 11 March, about one month behind other areas.

TRADE AT RISK
Chinese petrochemical producers may try to manage extremely high inventory by exporting some commodities. However, demand is also slowing down beyond China. Price competition might follow.

Chinese players have begun to worry about the supply of imported goods, such as those from Iran.

Iran is an important source of some petrochemical products in China, including methanol, polyethylene and butadiene.

The main methanol plants in Iran are operating smoothly at present. Domestic plants are mainly located in coastal ports and will not adjust production plans in the short term due to the impact of virus transmission, Iranian manufacturers have said.

From the inspection and customs declaration of butadiene goods arriving at ports in early March, there is no abnormal situation.

Later, however, the turnover efficiency of this part of the supply chain may slow down.

As the possibility of the epidemic spreading from Iran to other Middle East regions increases, the market is worried that goods from the Middle East might be disrupted. For China and southeast Asia, the region is an important import source of propylene, polyolefins, methanol and other products.

There is a heavy turnaround schedule for polyolefin units in Saudi Arabia and other Middle Eastern countries in March and April. The impact of the epidemic is expected to be limited in the short term, ICIS analyst Joey Zhou said.  But If the epidemic remains as a pandemic until May, chemicals production and exports from the Middle East may be tightened.

Chinese market participants are more worried about end-use product exports if systemic risk occurs.

Europe and the US are the main export destinations for Asian manufacturing industry. And while the epidemic spreads in Europe and in the US, China’s export orders follow the risk of decline.

This may be reflected in operating rates late in the second quarter or in quarter three and cast a shadow over export-led sectors like textile clothing, tyres, and plastic products.

The possibility of global recession is rising. The recovery of supply chains and demand, on a global basis, will be the major topic for the petrochemical industry in the second half of 2020.

The ‘anti-globalisation trend’ which has emerged in the past few past years could be disrupted by the pandemic, as global collaboration will be critical.

Circulation within the domestic economy will be the key factor for China in 2020. This aligns with the direction of reforms over the past few years and the drive to shift the economy away from exports and towards more domestic consumption.

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Source :ICIS

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