13:47 PM | February 19, 2020 | Trisha Huang and Sok Peng Chua
The typical post–Lunar New Year holiday recovery in China’s petrochemical sector has been slowed by the logistics constraints and labor shortages stemming from the country’s extensive coronavirus (Covid-19) containment measures, according to market participants.
Across several petrochemical value chains, the extended holiday together with travel restrictions have delayed workers from returning to factories and stalled the resumption of operations at downstream units. Elevated inventory levels are an added challenge, since below-average downstream operating rates have exhausted the available storage space and will delay restocking, putting pressure on upstream production.
“Now the biggest issue is labor shortage,” says Ding Wei, IHS Markit research and analysis director. Even if a company has received approval to resume operations, employees face barriers to return to factories because they may not be permitted to travel outside their counties or provinces. Operating rates in China’s polyester industry, the largest in the world, have plunged to a record low level of about 60% in February.
Mandatory quarantine and traffic-control measures have been widely implemented to combat the coronavirus outbreak, leading to extended outages downstream and challenging intercity and interprovincial transportation. Rising inventory, labor shortages, and raw material supply issues are major factors weighing on polyester production, according to the IHS Markit Global Aromatics weekly report.
“This situation may persist for the next seven to 10 days. Even when factories resume operations, they face the problem of high inventory,” says Ding. China’s purified terephthalic acid (PTA) inventory in February is at a four-year high of 2.3 million metric tons (MMt), up more than 1 MMt from the previous year.
Polyester downstream sectors have already shut for two months, but upstream PTA has continued to operate at about 75%, adding to the rising inventory level. Benchmark PTA futures on China’s Zhengzhou Commodity Exchange have fallen 482 renminbi ($69) or 9.7% from 2 January to 19 February, closing at 4,482 renminbi per lot on Wednesday. Average trading volume has also fallen from 1.2 million lots in December to 387,000 lots in February, down 67.5%.
“Getting feedstock to our plant has been a challenge. Some roads remain closed and the cost of transportation has also increased,” says a China-based phenol buyer. He adds that he had prepurchased sufficient feedstock before the Spring Festival to cover operations for the next two months.
A styrene trader in Zhejiang Province adds that even if plants have transport vehicles, they are unable to find drivers owing to the travel restrictions imposed by different counties. “It is also difficult to sell styrene derivatives since the automobile and construction industries are still in limbo,” he says.
Restart dates for plants and companies may also be postponed from the official date of 17 February due to local governments’ requirement that employers need to have sufficient masks and protective gear for employees before they can start work, according to market participants.
Across all value chains in China, downstream production loss is more significant than upstream, says Brian Lee, IHS Markit research and analysis director. Spot styrene prices tumbled by $114.50/metric ton, or 12.6%, between 22 January and 18 February, as the extended holiday and sluggish consumption led to a hefty build in China’s stockpiles. Inventories have more than doubled to about 280,000 metric tons this week, compared with 134,000 metric tons at the start of January, following seven consecutive weeks of build, according to data from market sources.
“The problem started downstream first because of logistics constraints. Polymer producers are burdened with high inventories because they can’t move product out. Now all the styrene producers have had to cut output. We have heard of Chinese polystyrene makers shutting down their plants and reselling their styrene back to the market,” says Lee.
Spot trading activity has been stymied by the lack of storage space, another Chinese styrene trader says. The reality facing sellers and buyers is that there are no more styrene tanks available in eastern or southern China, a situation made worse by the slow pace of downstream operating-rate recovery following the extended holiday. “Price discussions cannot proceed unless the buyer or the seller has first secured space to store the cargo,” the trader adds.