Volatility In Global Petrochemical Markets

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Asian Petrochemical Markets See Volatility As Coronavirus Pandemic Spreads

Asian petrochemicals demand is expected to be weighed down this week following the OPEC+ meeting that led to falls across the oil complex and petrochemical markets right at the start of the week, coupled with the impact from the global COVID-19 outbreak that has already caused demand disruption.

Asian petrochemical markets saw extreme price swings last week as the coronavirus outbreak continues to spread. May ICE Brent crude oil futures fell by well over $2/b overnight to around $33-$34/b on March 12. There is apprehension that if the economic situation does not improve “people will stop buying clothes and pet bottles, which will affect the entire polyester chain.”

In the Asian petrochemical market, the benchmark paraxylene CFR Taiwan/China marker shot up $36.50/mt on Tuesday, March 10, to $618.83/mt after falling $100.50/mt on March 9, to an 11-year low. PX market participants said that purified terephthalic acid, or PTA production within China is continuing unabated. Chinese PTA producers are seeing healthy production margins for PTA and that is the main source of demand, sources said.

PTA is the main downstream product of PX and therefore PX demand into China is not suffering at the moment. Also, since PTA storage is relatively easy, PTA producers can keep producing without many concerns around where the product will be stored.

A supportive factor for some petrochemical markets seems to be the domestic price levels in China, which for some markets did not fall as steeply as international prices. “The market could rebound by the overall recovery of the industry, since the coronavirus is under great control here,” a Chinese trader said this week.

Improvement has been seen across downstreams with acrylonitrile-butadiene-styrene and polystyrene producers increasing operating rates this week. However, market sources also noted the possibility of higher runs at styrene plants when demand comes back, which could weigh on the market.

Meanwhile in intermediates, Asian monoethylene glycol rebounded $41/mt day on day to $490/mt CFR China on Tuesday, March 10, gaining back most of the $46/mt loss on Monday, only to slump $4/mt day on day to $486/mt CFR China Wednesday. MEG was heard traded at $473/mt CFR China for prompt delivery Thursday morning, while the domestic cargoes were heard traded at Yuan 3,860/mt ex-tank or an import parity level of $465/mt CFR due to the fall in crude oil overnight amid fears around the coronavirus pandemic.

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Outlook
The volatility and downtrend in Asian paraxylene is likely to persist on weakness in related markets and demand disruption following the plunge in oil prices, amid a lack of bull factors in the polyester chain. Prices have been hitting fresh four-year lows, and sources have noted that it is tough to tell when PX will recover, considering the softness seen in up and downstream markets along with dampened buying confidence and rising downstream inventories.

A supply glut in China and weak upstream would continue to pressurize Asian PTA prices. Even though downstream polyester and textile sectors in China had gradually improved run rates last week, Chinese PTA stocks remained at multiyear highs of more than 3 million mt, sources said. A major Chinese PTA producer has lowered its offer for one-day trip cargo to $500/mt CFR China, down from $535/mt last week, amid falling crude oil and paraxylene prices. Other northeast Asian PTA producers continue adopting a wait-and-see approach without firm offers yet.

In the country’s polyester industry, the average operating rate has improved to 70% from 60% in early February, spelling good news for the upstream mononethylene glycol (MEG) market.

“We expect textile and polyester operating rate remain an uptrend in coming 2-4 weeks, up to 75% till mid-March,” said market analysts. Increased liquidity in the financial market following cuts on the banks’ reserve requirement ratio should also provide a boost to the industry, they believe.

In the PTA sector, supply-demand fundamentals are expected to remain weak despite increasing March operating rates at downstream polyethylene terephthalate (PET) industry.

“The velocity of operating rate increasing of PET is likely to slow down in end-March because of the high inventory levels of end-products, cloth,” said one source, citing the global economic slowdown will dampen demand for clothing and consequently hit China’s exports.

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It does not help that an overcapacity exists following recent heavy expansion, with Hengli Petrochemical beefing up production despite current high inventory. China, which is the world’s second-largest economy, is looking at a sharp slowdown in the first quarter with February data on both manufacturing and services sectors indicating steep contractions.

European markets
The collapse of the OPEC+ production cut agreement last week and Saudi Arabia’s subsequent launch of a price war sent jitters across petrochemicals markets, pushing outright prices and premiums lower and making markets more volatile across the aromatics complex.

The ripples of the crude price plunge were felt across the European xylenes chain, with paraxylene dropping $67.25/mt to an 11-year low at $543.50/ mt FOB ARA and orthoxylene losing $65/mt to a 26-month low of $780.0/ mt.

The selloff in the European markets was also sparked by starkly lower prices in Asia. European traders will be keeping a close eye on both Asian markets and crude prices as they look for price direction.

Latin American petchems could take a hit on currency depreciation across the region

Petrochemical markets in the Americas are expected to decline in the coming week on soft market fundamentals including plunging energy prices and continued fears of limited trading amid the coronavirus outbreak.

US aromatics prices are expected to remain under significant pressure amid anticipated continued declines in the energy complex on the Saudi Arabian price decrease and April output increase. Paraxylene prices are expected to remain soft on the back of further East Coast arrivals.

Latin American countries are expected to face challenges in the petrochemical trade flow following currency exchange depreciation in the region due to uncertainties generated by the coronavirus pandemic and a global stock market collapse, which could decrease volumes or create payment issues.

In Argentina, the Peso’s decline was minor since the beginning of the year, with the country not being economically impacted by coronavirus’ pandemic as such. The Peso started January at 60/$1 and was at 62/$1 last week. In 2019, the peso’s value had nosedived nearly 60%.

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“The plastic prices in Pesos are rising following the devaluation, but it’s quite small difference,” a domestic distributor said. “The only thing that may affect the market somehow is producers putting on hold their planned increases due to the uncertainty in the market, which is actually happening in Argentina.”

Brazil was the most affected country of the region in 2020, as the real declined by about 22% against the US dollar since January 1. Last week, the US dollar reached 5.02/$1 against the Brazilian real, the highest exchange value rate for the greenback against the real in history.

In the afternoon, it retreated and closed at 4.79/$1, still the highest nominal exchange rate historically. A Brazilian trader said operations have been affected lately. “Clients are not calling, and we imagine some issues with payments in the near future,” the source said.

Another local trader said volumes are already been affected due to the situation, and it shall impact more in the near future as the market hasn’t had time to process what’s currently happening worldwide.

For most traders in Brazil, the currency exchange is due on the settled payment day, whether this be when the client closes the deal, whether in 30 days from there or on delivery, depending on each particular agreement. “No one hedges,” the trader said. Considering that scenario, if a client closed a deal in mid-February, when the Real was 4.30/$1 and is paying upon delivery today, the difference would be around 14%. The Colombian Peso has been one of the most affected since January 1, down about 20% to 3951/$1 as of last week.

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