The sharp fall in global oil prices this year has begun to drag down petrochemical prices and spreads as demand slows in China while new capacity continues to arrive on the market, experts say.
Amid thin demand from China, prices of several petrochemical products in Asia have taken their cue mostly from the price volatility in crude futures, said Clement Choo, editor for Asia petrochemicals with Platts.
Toward the end of August, spot prices for several key petrochemicals hit their lowest levels in years. Among them was ethylene, which hovered at six-year lows.
Platts, the London-based provider of energy and petrochemical information as well as benchmark price references, reported the first fall in five months in its global benchmark in July. The Platts Global Petrochemical Index (PGPI) indicated that monthly average petrochemical prices fell US$91 per tonne from June to $1,013 in July. The last time global petrochemical prices declined on a monthly basis was in January this year when they dipped 14% to $850.
The monthly PGPI is a benchmark basket of seven widely used petrochemicals including olefins, ethylene, propylene and paraxylene. The slide in oil prices has brought down the cost of naphtha, a feedstock needed for petrochemicals that are used to make plastics, rubber, nylon, and other consumer products.
As crude prices rebounded in August, Mr Choo said many spot petrochemical prices followed suit, but increases were capped by market concerns about oversupply and poor demand. Ethylene faces an oversupply as healthy production margins are allowing cracker operators to run their plants at full capacity, but olefins production is expected to thin from September when steam cracker turnarounds take place.
Market participants are hopeful that the planned maintenance shutdowns for steam crackers and downstream derivatives such as styrene monomer will help support prices starting as soon as September, helped along by crude prices if they continue to rebound, said Mr Choo.
Patipan Sukorndhaman, executive vice-president for finance and accounting at SET-listed PTT Global Chemical Plc (PTTGC), said that petrochemical spreads did not look good given the weakness in China and low global oil prices.
"It's the same as what's happening in the stock market. If the index is likely to fall further, people tend not to buy shares because they wait for a lower price," Mr Patipan told Asia Focus during a telephone interview. "In the petrochemical industry, now people expect prices to slip further in line with the oil price, so they will delay the new purchases and use their inventory."
China is the largest petrochemical consumer in Asia and the third largest globally, accounting for one-fourth of global consumption. Asia Pacific as a whole represents about half of the volume consumed globally, according to BMI Research.
KPMG, the Dutch consultancy, has estimated that consumption in China rose by about 10% a year over the past decade on the back of demand for Chinese manufactured goods. Industry players are now observing a slower increase in petrochemical product imports by the country.
Sukrit Surabotsopon, the president of SET-listed IRPC Plc, said that even despite the slowdown, China's petrochemical consumption remains very high in line with the country's gross domestic product (GDP) growth.
"Normally, the refining and petrochemical industry cyclically slows down in the third quarter after reaching its peak in the second quarter," he told Asia Focus.
Siam Cement Group (SCG), Thailand's top industrial conglomerate which earns roughly 60% of its profit from petrochemicals, acknowledged that petrochemical spreads have declined in the current quarter, quoting around $800 per tonne for polyethylene (PE) and $600 for polypropylene (PP). The average spread this year to date has been close to $700, slightly below last year's average of just above $700.
"PE spreads has been down slightly but the current level is still good for the petrochemical business," said SCG president and CEO Kan Trakulhoon.
The steeper drop in the PP spread is mainly driven by a new capacity in China but luckily most of SCG's petrochemical output is PE. As well, the company has aggressively increased its high value added (HVA) petrochemical products in recent years, which has helped cushion the impact of fluctuating prices of commodity petrochemical products, he added.
Inventory losses
As many key chemical building blocks are directly produced from oil and its derivatives, such as naphtha and natural gas, the deeper slide in oil price means a bigger loss in the inventories that companies keep for production.
Analysts thus expect refining and petrochemical firms including PTTGC to report a one-time stock loss in the third quarter after posting stock gains in three months earlier when oil prices shot to more than $60 per barrel.
"PTTGC's earnings are driven by petrochemical business," said Naphat Chantaraserekul of Krungsri Securities, noting lower oil prices factored into lower price assumptions for PTTGC products including high-density polyethylene (HDPE), low-density polyethylene (LDPE) and linear low-density polyethylene (LLDPE).
This would reduce the earnings of PTTGC, Thailand's largest petrochemical producer, by 4% this year and 3% in 2016 despite lower impacts of stock loss than listed refiners because of the lower capacity in the first quarter and earnings contributions from refineries, Mr Naphat wrote in a recent report on the oil and gas sector.
"Although IRPC's earnings will be diluted the most in terms of percentage among refiners, we believe investors trade IRPC on its upgrading programme, not on near-term earning," he added.
Citing the twin effects of a supply glut and the slowing global economy, Krungsri Securities has cut its assumption of the Dubai crude oil price, a widely used benchmark in Southeast Asia, to $52 a barrel for this year and $55 for 2016, from $62 and $65, respectively.
The prices of Brent crude oil has fallen steadily from $100 a barrel last year and reached a seven-year low of $43 in July before rallying in the past two weeks to just above $50. However, US oil companies shave stunned global rivals by maintaining production even though many fields there are not viable at current prices. Saudi Arabia continued to pump crude at a record 10.57 million barrels per day in July, while other Gulf competitors have not backed down from competing in price to retain market share.
"The fundamentals of the oil market have deteriorated faster than we had anticipated, which leads us to believe that a sustainable rebound in oil prices to above $70 is less likely in the next 12 months," wrote Mr Naphat.
"Given weakening global and Chinese economic growth, oil prices look likely to remain low for months and likely years to come while US crude inventories hit an all-time high, albeit softening in recent weeks. We believe investors' risk appetite for oil has waned while the weak global economy will continue to weigh on high demand."
SCB Securities (SCBS) lists Indorama Ventures Plc (IVL) as its favourite stock among the petrochemical and energy companies that are dependent on crude prices and have inventory gains or losses each quarter.
IVL has achieved the highest volume growth through acquisitions and has expanded its production from 3.2 million tonnes including polyethylene terephthalate (PET) and purified terephthalic acid (PTA), to 6.6 million tonnes over the past five years, SCBS wrote in a recent report.
Its cash flow available to shareholders has risen from $270 million in 2010 to $591 million now despite depressed chemical spreads and the China slowdown. Based on data provided by the company, IVL made $90 per tonne in net cashflow over the last 12 months, which is very close to the $85 it earned back in 2010 during a peak in the petrochemical cycle, the brokerage added.
Aloke Lohia, the IVL group CEO, said crude oil price volatility could mean big losses for the petrochemical sector in general but IVL's businesses were mainly serving makers of consumer goods such as packaging for drinking water and fibres for diapers, which are resilient to recessions.
"It's true that the absolute price of IVL products is adjusted to raw material prices but the IVL business model is differentiated and diversified to reduce concentration risks. Therefore, the company shows resilient earnings although the global economic environment is quite weak," he told Asia Focus, citing performance in the past 12 months.
Asean Expansion
As Asean countries have continued to develop their petrochemical sectors, SCG's Mr Kan said that now Thailand and Singapore were in the forefront of the industry and Thailand was well ahead of its only regional rival.
"There is no big concern about the environmental effects in Singapore, like what we faced but have already gone through in Thailand," said Mr Kan.
Thailand is home to seven crackers, compared to two in Malaysia, one in Indonesia and a smaller one in the Philippines with the capacity of only 300,000 tonnes a year, he added.
SCG Chemicals has formed a joint venture with its Vietnamese and Qatari partners for the $4.5-billion petrochemical complex on Long Son Island off the coast of Vietnam. Together with its SET-listed subsidiary Thai Plastic and Chemicals Plc, SCG owns 46% of the project.
Malaysia's Petronas Chemicals Group (PCG), a subsidiary of the state-owned oil company Petronas, has developed a refinery and petrochemical integrated complex in southern Johor to produce specialty chemical products such as synthetic rubber and polymers when it starts operating in mid-2019. The project is part of the proposed Pengerang Integrated Petroleum Complex (PIPC), which will also consist of a 300,000-barrel-per-day refinery.
Together with its German partner BASF, PCG broke ground on a new world-scale 2-ethylhexanoic acid (2EHA) plant in Kuantan that is scheduled to come onstream by 2016.
PTTGC, meanwhile, is finalising plans for two new plants worth $1.2 billion. The $200-million metallocene LLDPE in Map Ta Phut is projected to start production by 2018 with annual capacity of between 300,000 and 400,000 tonnes. Also planned is a $1-billion plant for propylene oxide and polyols.
The company is also in talks with the Indonesian oil and gas firm Pertamina and the Saudi Arabian national oil firm Saudi Aramco to form a joint venture for an oil refinery and petrochemical complex in Balongan City on Java Island.
Also in Indonesia, a refinery and petrochemical complex worth $7 billion in Riau province is slated to break ground in 2016. The project was initiated by Oman while Pertamina will be buying the oil products.
State-owned Petrolimex, Vietnam's largest oil product importer and distributor, has teamed up with Japan's Nippon Oil and Energy on a feasibility study for a refinery joint venture in Khanh Hoa province. The study follows an agreement signed by the two partners to build a refinery in the Nam Van Phong complex. It is scheduled to start production by 2024.
