Asian petrochemicals outlook, w/c May 27 :

OLEFINS

Strength in Asian ethylene markets is expected be hit by rising supplies. Taiwan's Formosa Petrochemical is closing its latest tender to sell 10,000 mt of ethylene for H2 June/H1 July loading. China's ethylene demand is also seen to be slowing down as most end-users managed to buy their requirements for June.

Meanwhile, the Asian butadiene market is expected to be firm in June as South Korea's Lotte Chemical will produce 5-10% less butadiene at its Yeosu and Daesan units due to lower butadiene yield from its crude C4 feedstock. This could mean an estimated loss of 2,000-3,000 mt of butadiene cargo across both the units.

The Asian butadiene market remains tight due to a prolonged strike at South Korea's Hanwha Total Petrochemical cracker in Daesan. The development comes amid YNCC's month-long turnaround in May at its 240,000 mt/year butadiene unit, rendering the June arrival market tighter.

POLYMERS

The Asian high density polyethylene market is likely to remain bearish due to uncertainties stemming from the US-China trade tensions. Despite the drawdown of inventory from a combined PE and polypropylene inventory pool of 890,000 mt to 760,000 mt week on week Wednesday, market sources said demand for imported cargoes was weak as local inventories were still sufficient to meet immediate needs.

Buying interest in Southeast Asia will also be weak due to the Muslim holy month of Ramadan, and supplies are ample in Vietnam and Indonesia, with market participants adopting a wait-and-see approach. In the Indian market, the overall weakness in Asia dampened sentiment with prices of most PE grades declining.

Sentiment in the Asian low-density PE market is expected to be lackluster this week as buyers wait for a clearer price trend to emerge.

INTERMEDIATES

Asian monoethylene glycol prices climbed $10/mt day on day on Friday which caught many trade participants by surprise, despite soft crude oil price and weak MEG fundamentals. Most trade participants were worried MEG prices could not sustain an upward trend, and the market may have to correct soon due to a supply glut and waning demand. MEG inventories remained ample with 1.31 million mt at main ports of eastern China. Downstream, demand was decreasing along the whole polyester chain in China amid an escalation of the US-China trade dispute, with polyester plant operating rates dropping to 88% Friday and expected to continue to fall, sources said.

The Asian purified terephthalic acid market continued to demonstrate weakness Friday, with prices coming under pressure recently after a major PTA maker stopped purchasing spot material, market sources said. PTA tumbled $35/mt week on week to be assessed at $770/mt CFR China Friday amid weak demand. Meanwhile, China domestic PTA plunged Yuan 550/mt (around $80/mt) to Yuan 5,520/mt ex-works over the same period. There is still room for CFR China PTA prices to fall further due to a healthy PTA-PX spread, sources said.

Performance of most businesses in petrochemical industry was halved compared to their performance in 2018 due to slow demands resulting from continuous trade conflict between the U.S. and China and continuous slump in petrochemical industry. Market conditions for ethylene and PE, polypropylene (PP), and ethylene glycol (MEG) had showed weak trends in 2019.

The wave of new capacities in the US, leveraging on shale gas, and expectation of slower global economic growth has affected ASP and taken a toll on product spreads. The commercial operation of RAPID would also reduce LCT’s product premium.

Estimate that for US$50/mt drop in spread, LCT would lose RM400m in profits. Given the market down-cycle, 2019-21F earnings forecasts by 42-83% which culminates to -38% CAGR over 2018-2021F.

The wave of new petrochemical supply in the US, leveraging on shale gas, coupled with the expectation of slower GDP growth in the wake of the US-China trade tension drove the industry deeper into the market down-cycle. The slowing demand led to lower ASP while naphtha costs has risen in tandem with crude oil prices. These narrowed naphtha-PE spread which now at US$560/mt, from US$600/mt (-8%) in 4Q18 and US$685/mt (-18%) in 2018.

Narrower product premium ahead of new local capacity. In the past, LCT’s products command US$80-100/mt premium to the benchmark price. However, expect the premium to narrow going forward with the onset of PChem’s RAPID complex coming on stream in 2H2019.

Challenging earnings outlook. FY19-21F earnings forecast by 42-83% on lower product spread assumption. Estimate profits to erode by RM400m for a US$50/mt contraction in spread. That is despite new earnings stream from US shale gas project and full-year contribution from the 200k MTPA PP3 plant. Forecasts earnings to decline at -38% CAGR over 2018-2021F.