The global petrochemical industry is heading into the second half of 2019 caught in a whirlwind of volatile crude oil prices, ongoing trade disputes and geopolitical tensions. International upheaval has shaped trade flows and price movements in the first half of the year alongside another major trend – the rise of new petrochemical plants as additions to upstream refineries in China.
China’s new mega-refineries, as well as new capacity in Southeast Asia, seek to bridge gaps in key upstream and downstream supply chains and have upended established trade flows into China, while also affecting prices and product margins associated with upstream petrochemicals such as isomer-MX and paraxylene. The trend is expected to continue for the rest of 2019, with further capacity due online in the coming months.
US trade disputes with China and Mexico have also upset global supply, with tariffs and counter-tariffs forcing producers of various petrochemicals to look for new markets and possibly disrupt long-established supply chains if traditional routes are closed or too costly. Refinery outages in various regions have further redirected export flows between Asia, the US and Europe. With some markets facing oversupply or lack of demand, due to both the trade disputes and additional Asian capacity, there was a general bearish trend in the first half of 2019, and this is expected to continue into the later part of the year.
Geopolitics in the Middle East, notably US sanctions on Iran, have also interrupted some global oil flows, while continued shale-led surplus olefins production further cements the US’ position as the global price floor for many petrochemicals. Finally, recycled polymers are expected to gain an increasing foothold, especially in more developed economies, as global brands embrace sustainability under growing pressure from consumers, the media and environmental policy.
PX producers mull cutting runs on thin margins, limited PTA demand growth
Bullish expectations at the end of 2018 for this year have largely proved to be unfounded as capacity increases in the first half of the year brought global paraxylene prices lower. Asian paraxylene prices fell 20.4% over the second quarter to $838/mt CFR on June 28. The fall coincided with Hengli Petrochemical starting operations at its integrated crude-to-petrochemical refining complex in Dalian.
The complex has two paraxylene production lines, each with a capacity of 2.25 million mt/year, which provide captive feedstock to three purified terephthalic acid lines, each with a capacity of 2.2 million mt/year.
Hengli is one of the world’s largest producers of PTA, which goes into the making of polyester products. It has traditionally been a major buyer of spot paraxylene, but spot PX delivery to Dalian has drastically decreased since April.
The complex is yet to reach 100% run rate, but market participants said a large fall in spot paraxylene demand from Dalian following the startup and the subsequent ramp-up of Hengli’s PX production has upset the Asian supply-demand balance.
Asian aromatics refining margins have also narrowed post the Hengli startup. The spread between CFR Taiwan/China paraxylene over feedstock CFR Japan naphtha physical sank to $279.88/mt on May 17, the lowest since March 30, 2015.
Asian PX-naphtha margins averaged $559.41/mt in the first quarter, but fell to $369.57/mt in Q2 due to ballooning Chinese domestic supply. The fall was exacerbated by a weak Asian benzene market in H1, forcing Northeast Asian aromaticsproducers to announce operating rate cuts from May. In Japan, JXTG Nippon Oil & Energy announced a 20% reduction in PX production from May to August because of the narrow PX-naphtha margin, S&P Global Platts reported earlier.
Non-integrated aromatics’ units running on isomer-grade mixed xylene feedstock were among the worst hit in Q2, said market participants, adding that a spread of $160- $180/mt between PX and isomer-MX was needed for a typical breakeven.
The spread between PX and isomer-MX hit a year-to-date low of $108.67/mt on June 26, down from $466.67/mt as recently as March 12. Northeast Asian producers were also hit by the discontinuation of Iran sanctions waivers sharply increasing the feedstock costs for condensate splitter based PX producers.
South Korea has been the largest buyer of Iranian South Pars Condensate (SPC) since 2016. It imported 12.74 million mt of SPC in 2017, accounting for 45% of the country’s total condensate imports, customs data showed. South Korea’s Lotte Chemical was heard mulling lowering its operating rate at two PX units in Ulsan with a combined capacity of around 750,000 mt/year, if the PX-MX spread keeps narrowing.
Another Korean producer, Hyundai Cosmo, was considering adjusting its run rate at its 1.18 million mt/ year PX plant in Daesan if the negative margins continue, Platts reported earlier.
Elsewhere, China’s Qingdao Lidong Chemical cut rates at its plant in northern Shandong province by 30% from June as margins for paraxylene fell. The plant can produce 1 million mt/year of PX and about 270,000 mt/year of benzene.
Market participants expect PX-MX margins to fall further as the second half of the year looks set to bring further PX capacity expansions, such as the 1 million mt/year Sinopec Hainan No. 2 plant. The market also expects restarts at major MX-feed paraxylene production units, such as S-Oil’s No.2 plant and Formosa’s No.3 plant, in the third quarter. In Southeast Asia, the start of operations at the Hengyi Brunei PMB integrated petrochemical complex is imminent after the company carried out its comprehensive test “smoothly,” Platts reported earlier.
The first phase of the project expects to see crude processing capacity of 8 million mt/year, producing 1.5 million mt/year of paraxylene and 500,000 mt/year of benzene. In the second phase, the refinery will add 14 million mt/year of crude processing capacity and 2 million mt/year of paraxylene. The plant will move paraxylene from Brunei to Hengyi’s domestic downstream enterprises in Zhejiang, China, thereby reducing spot PX demand from Ningbo, said sources.
Spot demand from Ningbo is expected to fall further in the fourth quarter, coinciding with the expected startup of Zhejiang Petrochemical’s 4 million mt/year PX capacity integrated petrochemical complex in Zhoushan.
PTA fundamentals to stay strong on limited capacity growth
Downstream, H2 outlook for the Asian PTA market looks positive amid limited new capacity, despite uncertainties around demand from downstream polyester and textile sectors.
Active PTA capacity in Asia increased to 67.1 million mt/year by the end of June, after the restart of China’s Fuhaichuang Petroleum and Petrochemical’s 1.5 million mt/year No.3 line, South Korea’s Hanwha General Chemical’s 450,000 mt/year No.2 unit, and the commissioning of China’s Sichuan Shengda Chemical’s 1 million mt/year PTA plant in H1, Platts data showed.
China’s Dushan Energy Ltd. (Xinfengming)’s new 2.2 million mt/year PTA plant is expected to come online in September. The plant will start up on schedule with at least two monthly term PX contracts for H2 already agreed, sources said. Chinese PTA fundamentals are expected to stay strong, with balanced-to-tight supply. PTA prices may be pressured by the startup of Xinfengming and the restart of the Fuhaichuang plant after turnaround, sources said. Startups for Yisheng Petrochemical’s 3.3 million mt/year No.5 PTA line in Ningbo and Hengli Petrochemical’s 2.5 million mt/year No. 4 PTA unit in Dalian are likely to be delayed to early 2020, sources said.
Xinfengming is one of the biggest polyester producers in China with an existing capacity of 3.7 million mt/year. The new PTA production will be used entirely for internal consumption.
In India, JBF Industries’ 1.25 million mt/year PTA plant in Mangalore is unlikely to start in the foreseeable future, said market sources. Neighboring ONGC Mangalore Petrochemicals will continue to export PX volumes that were originally planned for JBF’s new PTA plant.
Meanwhile, Indian Oil Corp.’s 553,000 mt/year PTA plant remains shut without any clear start-up timeline, a source close to the company said, following a planned six-week maintenance that began mid-February. Therefore, Indian PTA buyers have been actively seeking PTA imports amid tight domestic supply.
Some Indian polyester manufacturers approached Northeast Asian PTA producers to negotiate term contract for supply in H2. However, Asian demand sentiment is generally weak further down the polyester chain for H2, especially in China, due to the US-China trade tensions and slowing economic growth, sources said. Nevertheless, the Chinese market is unlikely to see chronic PTA length in H2, sources said, as major PTA producers may adjust operations in response to the market.
Prompt supply tight in Europe as producers cut run rates
European paraxylene spot activity is expected to be thin in H2, with spot prices tracking the Asian market. As in H1, European producers may continue to limit production to contractual volumes only. Capacity reductions of around 30% could continue as producers cope with excess supply, said sources. However, spot cargoes were hard to find despite excess supply, European traders said.
European FOB ARA spot pricing is, on average, at a $100/ mt discount to the Platts CFR Taiwan/China marker for forward laycans. However, a lack of transparency in the European spot market could create opportunities for traders to make higher margins on spot trades, thereby lifting prices for prompt cargoes.
Global MEG braces for supply glut amid new capacity, uncertain demand
Market sentiment is expected to remain bearish for global monoethylene glycol (MEG) in the second half of 2019 amid a supply glut, as most MEG producers are already facing losses with prices hitting an average $538/mt CFR China in June, the lowest since March 2009, S&P Global Platts data showed. Besides ethane-based MEG, almost all other MEG manufactures are currently running at a loss. The MEG profit margins are calculated to be averaged minus $8/mt, minus $155/mt and minus $43/mt for naphtha-based, ethylene-based and coal-based MEG respectively in the first half of 2019 in Asia, Platts data showed. Still, majority MEG suppliers have chosen to continue operating at a loss because of either positive cash flow or long-term business development considerations, sources said.
Ample supply with new MEG capacity
Global MEG supply is long following the startup of two new MEG plants with total capacity of 920,000 mt/year in the US in H1 2019, and additional capacity of 2.59 million mt/year to be expected in H2 2019, according to sources.
The overall global MEG capacity has increased to around 37.5 million mt by June 2019, after the startup of Sasol’s 220,000 mt/year MEG line (total 380,000 mt/year capacity for ethylene oxide and MEG ) in Lake Charles, Louisiana, as well as Lotte Chemical’s 700,000 mt/year MEG unit at Lake Charles, Louisiana, according to Platts data.
Asia’s MEG capacity remains stable at 29.5 million mt/ year by June without new capacity added in H1 2019. This includes 10.7 million mt/year MEG capacity in China, out of which around 42% is contributed by coal-based MEG plants in China, based on Platts data.
Asian market participants are currently eyeing on the progress of Malaysia’s Pengerang Refining and Petrochemical (PrefChem) project, which includes 740,000 mt/year MEG capacity. The new MEG unit was tested successfully and managed to produce on-specification MEG in end-March via imported ethylene, yet brought offline subsequently while waiting for stable ethylene supply from its new 1.2 million mt/year steam cracker unit, Platts reported earlier.
However, a fire broke out at the atmospheric residue desulfurization unit of the new refinery at the same site on April 12, leading to delays on the commissioning of the new steam cracker, Platts reported earlier.
The company purchased naphtha from the spot market subsequently to test the steam cracker, but failed the latest startup attempt in end-June without a clear restart timeline, a source close to the company said. Some trade participants said the company would restart the steam cracker and MEG unit in end-July, expecting the first MEG cargo to sail off in late-August or early-September, but this could not be directly and immediately confirmed with the company.
In addition, MEGlobal plans to bring online its 750,000 mt/ year new MEG at Freeport Texas in November, sources close to the company said.
In China, new investment to coal-based MEG plants are expected to slow down amid poor MEG profit margins, sources said. An estimated 1.1 million mt/year of new coal-based MEG capacity totaled in H2 2019, lower than the initial expectation of 2 million mt/year additional coalbased plants this year, Platts reported earlier.
This includes Xinjiang Tianye (Group) Co. Ltd.’s 100,000 mt/year capacity expansion on the existing facility and another new 600,000 mt/year MEG line at Shihezi, as well as Inner Mongolia Rongxin Chemical Co., Ltd.’s 400,000 mt/year new MEG unit at Dalad, which is currently undergoing final preparation work before startup, according to market sources.
There will not be any new conventional MEG plants to be brought online in China this year, as the startup for both Zhejiang Petrochemical’s 750,000 mt/year MEG line at Zhoushan and Hengli Petrochemical Co., Ltd.’s 900,000 mt/year No.1 MEG unit at Dalian are likely to be delayed to early 2020, sources familiar with the matter said.
Separately, MEG inventories at the main ports in east China hit a record high 1.4 million mt in April, and have gradually dropped around 1.2 million mt by June, Platts reported earlier.
Trade participants believed MEG stocks would continue to stay high for the remaining of the year, unless large-scale production cut is seen globally.
Mixed sentiment for demand from downstream PET/Polyester
Sentiment is generally weak for demand along the whole polyester chain in H2 2019 in Asia, amid US-China trade tension and slowing global economies, even though some participants expect firmer buying interests in the third quarter.
Polyester demand in China was tepid even during the traditional peak buying season from March to May. As a result, there were averaged 20-day worth of inventories across various polyester filament yarn and staple fiber grades by end-May, almost 43% higher year on year, according to market sources.
Even though Chinese polyester finished goods eventually dropped to as low as seven-day worth of stocks by June, with healthy polyester operating rate above 90% of total capacity, some trade participants still take a dim view of demand, saying that such low polyester inventories were due to speculative purchases from downstream textile producers in June, not because of firmer demand prospects for H2.
Nevertheless, some other market participants believed that demand growth will hit the market. “It is just a matter of time,” a polyester producers said, adding that another peak period is usually expected for polyester products in H2 – during August and September – in order to prepare textile and apparel goods ahead of winter and year-end festivals.
Furthermore, many leading polyester producers in China are currently running at almost full capacity, indicating bullish demand expectation these major producers have, sources said. Trade participants are closely monitoring the orders from end-users for textile and apparel products.
China’s total capacity for polyester and polyethylene terephthalate (bottle grade) has hit around 56 million mt/ year by June, with around additional 4 million mt/year new capacity expected in H2, according to Platts data.
Asian acrylonitrile seen soft, Europe remains tight on turnaround
The Asian acrylonitrile market is likely to soften in the second-half of the year, in line with rising supply, while the prevailing tightness in European availabilities is expected to continue into H2 on the back of plant maintenance.
However, it does not change the current West-East trade flow. “Asia is moving down, but I don’t see product coming to Europe. Only a small amount from South Korea, but it has not increased,” one market source said, adding that weak Asian demand has not led to a diversion in trade flows. Asia’s ACN supplies are likely to increase after deepsea supplies from Ineos return to normal by September. Ineos declared force majeure on three acrylonitrile plants in America and Europe in H1 due to hiccups at the plants, which pushed the Asian ACN price to a seven-month high.
In addition, new ACN capacities are due to come online in China in H2, and coupled with fewer maintenance expected in South Korea, would likely slash the buying appetite for ACN in H2.
In China, around 520,000 mt/year new ACN capacities are due to come online in H2, while only two plants, each with capacity of over 500,000 mt/year, were heard to have scheduled a turnaround in H2.
Industry participants now expect the acrylonitrile market to fall back below the $1,500/mt level, especially towards the end of H2.
“China is getting more and more self-sufficient in terms of acrylonitrile production. I believe more Chinese producers are ready to sell to other regions in Asia by H2, especially after the production capacities come online in H2,” a producer in Northeast Asia said.
Jiangsu Sailboat sold at least two cargoes of ACN to a buyer in South Korea in H1, marking the first time China has sold a cargo to its Northeast Asian neighbour. Adding to the supply glut are idled plants returning to production. China’s Shandong Haili is expected to restart its 130,000 mt/year ACN plant by July or August after the plant was shuttered in H1 due to technical reasons, market sources said.
Maintenance at plants in Europe continues in Q3
In Europe, planned maintenance at units will continue into the third quarter, with market participants expecting availability to remain tight. Market sources said Europe’s supplies would increase in the fourth quarter, when maintenance season ends in October.
On the demand side in Europe, production of ABS and acrylic fibre derivatives have been running at healthy rates, with the bullish trend in the region likely to continue into H2.
In the US, market participants are eyeing downstream market development. “ABS [acrylonitrile-butadiene-styrene] demand is seasonally slow,” one market source said. “This end-use, second to acrylic fibre, could shift the balance if ABS demand remains mixed like the month of June.”
“However, that seems unlikely with interest rates being cut and other financial stimulus provided by global central banks. Auto demand is the driver here. If you watch auto sales, you will have a reasonable gauge to discuss the ABS end-use,” an industry source said.
Source: S&P Global Platts