Sector News

Global chem trade flows shift to Asia as pandemic causes demand collapse in the West

April 9, 2020
Chemical Value Chain

Asia may end up as a dumping ground for many chemicals from the world over, as US and European markets slump and economies slide into recession.

With demand drying up and chemical prices crashing in the West as a result of a no-end to sight to the coronavirus pandemic – deemed the worst since the Spanish Flu and the Great Depression – Asia is becoming a target for export cargoes.

Oil and chemical trade flows have changed rapidly since the global outbreak of the novel coronavirus, which was believed to have originated in China in December 2019.

However, the arbitrage window from the EU and Americas to Asia is now fast closing as many petrochemical prices in Asia continue to fall to record lows, with the margins now not workable, or not attractive for traders to bring in deep-sea cargoes.

The overloaded Asian markets are also not likely to absorb the deep-sea or arbitrage inflows as the economic indicators are poor and business undertakings are almost at a standstill as a result of lock-downs in place in many countries globally.

“The European cargoes flooding into Asia from March is a short-term stress behaviour regardless of the cost to balance the supply in Europe and the US,” said ICIS analyst Ann Sun.

Even hopes for China to rebound economically from the easing of its domestic coronavirus situation seem remote in a intertwined globalized world economy; China’s first-quarter economy may have shrunk 8.5% year on year, or 12.3% on a seasonally adjusted quarter-on-quarter basis, according to Oxford Economics.

Recovery would be slow that for the whole of 2020, the world’s biggest economy may not expand at all, it said.

China posted its slowest pace of economic expansion in nearly 30 years in 2019 at 6.1%, partly due to the prolonged US-China trade war.

Naphtha crack spread to ICE Brent crude oil futures stood at -$60.13/tonne on 7 April, deepening the negative spread from the preceding day’s close at -$47.45/tonne and the lowest since 2008.

The product’s crack spread, a measure of its refining margin, slumped from $19.08/tonne on 31 March to -$23.60/tonne on 1 April, when spot naphtha prices dropped to their lowest in 19 years.

Weakness in oil prices amid ample supply and poor demand caused by the coronavirus pandemic has hurt naphtha market sentiment.

Asia’s naphtha markets grappled with looming supply from the Middle East as refineries in the region return from scheduled turnarounds.

Weak transport fuels consumption in Europe on the back of restrictions to travel and lockdowns chipped away at gasoline-blending demand for naphtha.

Consequently, excess supplies from northwest Europe and the Mediterranean are envisaged to be finding their way to Asia as a receiving outlet, at a time when petrochemical demand is downbeat amid cracker turnarounds.

An estimated near 2m tonnes of Western arbitrage naphtha, or possibly more could land in Asia next month, elevated from monthly average volumes at around 1.5-1.7m tonnes.

Methanol suppliers and traders are targeting to ship cargoes to China owing to depressed demand in Europe and the US, according to ICIS analyst Rachel Qian.

In addition, cargoes from the Middle East especially from Iran are being diverted to China as well given the lockdown in India, a key market of the product, Qian said.

“This will lead to an accelerated competition between import cargoes and China local cargoes, and probably would cause some China domestic producers to lower their operating rates or shut down, as China is a marginal producer globally,” Qian added.

Seething with demand collapse in the US and Europe, the Asian butadiene (BD) market plummeted in early April as an influx of deep-sea cargoes from the west headed to Asia, prompting traders here with cargoes in hand to unload at lower-than-expected prices.

However, the arbitrage window from EU and Americas to Asia is now fast closing as many petrochemical prices in Asia continue to fall to record lows.

The margins now are not workable or not attractive enough for traders to bring in deep-sea cargoes.

Chinese demand for BD imports had slumped due to the availability of ample local supply.

With the downstream synthetic rubber (SR) market in the doldrums and demand for acrylonitrile butadiene styrene (ABS) falling, spot appetite for BD had waned.

Sentiment in the BD market has been negative in the chaotic market dominated by the coronavirus pandemic development in 2020 so far.

In the US, butadiene has few outlets as end-use businesses remain closed.

The demand shock of coronavirus has erased the logistics concerns stemming from that event, which were expected to plague the US value chain through H1 at least.

Now, domestic volumes are heading to Asia, which has become one of the few outlets for both US and European producers.

This is not likely to be a solution for long.

Propylene supply in Asia could lengthen in the near term with downstream producers looking at further lowering plant operating rates.

Deep-sea cargoes from south America, as well as India, were heard available due to poor downstream demand and may head to Asia.

Amid poor sentiment, spot propylene prices have fallen to a near five-year low of $557.5/tonne CFR (cost and freight) NE (northeast) Asia in the week ending 3 April, ICIS data showed.

In China, domestic propylene producers were trying to increase run rates on recent declines in feedstock costs.

The country’s appetite for imports will depend on pricing of domestically available cargoes. Based on current prices, imported cargoes are cheaper.

Spot prices for N-butanol (NBA) CFR NE Asia continued to fall as low-priced deep sea cargoes added length to a market.

Buyers polled did not show too much interest in spot lots.

The US-to-northeast Asia arbitrage window for mixed xylenes (MX) has re-opened after several years due to the collapse of aromatics prices in the US amid the coronavirus pandemic, while demand in Asia is comparatively stronger.

On 6 April, a spread of $85/tonne was seen between MX prices in the US at 0.88 cts/gal or around $270/tonne FOB (free on board) US Gulf; and in Asia at $355/tonne FOB Korea while freight between US and Asia was estimated at $70-80/tonne.

Other sellers in the US were still offering MX for prompt loading, with a discount on the reported prices due to poor outlook in the US market, according to market participants.

South Korea’s Lotte Chemical had bought a mixed xylene cargo of 30,000-40,000 tonnes loading from the US in April, which is expected to arrive in end-May.

Other regional end-users are mulling spot purchases from the US as well.

Ethylene suppliers outside the region continue to scour Asia for buyers for May and June arrival cargoes due to a drop-off in demand in their domestic and neighbouring markets.

Over 90,000 tonnes of deep sea cargoes have been sold into Asia for delivery between April and the first half of June.

Arbitrage opportunities for sellers seeking to move cargoes from the Americas and Europe, however, are increasingly slim as Asian spot prices weakened further.

Asia’s methyl tertiary butyl ether (MTBE) sentiment was weak, with the market oversupplied from offers from blenders and refinery end users.

The arbitrage window continues to open, with cargoes from Europe and the US offered.

By Felicia Loo

Source: ICIS News

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