COVID-19: China olefins weighed down by downstream inventory build

12:20 PM | February 27, 2020 | Sok Peng Chua

Industry watchers had expected bullish ethylene and propylene spot prices in China after the Lunar New Year holiday, but the coronavirus disease 2019 (COVID-19) outbreak has turned the situation on its head.

In January, expectations that prices would rise were based on reduced offers from steam crackers and rising Chinese derivative demand for February production, according to the IHS Markit Asia Light Olefins report. However, as the scale of the epidemic expanded and amid draconian measures taken by the Chinese government to contain the spread, demand destruction became inevitable.

China’s ethylene capacity in 2020 stood at 32.5 million metric tons/year (MMt/y), with the output loss in January put at 143,000 metric tons, or 5.7% of capacity, according to IHS Markit data. By 21 February, 60% of Chinese ethylene producers had reduced operating rates to around 80% due to weak derivative demand and production loss was estimated at 179,000 metric tons, or 7.63%, for the month. The ethylene spot price, valued at $865/metric ton CFR Northeast Asia on 23 January, plunged $160, or 18.5%, to a three-and-a-half-month low of $705/metric ton CFR last week. The ethylene outlook remains dim as derivative demand is curbed by rising inventory levels.

Polyethylene (PE) producers, for instance, have reported stocks surging to 23 days in mid-February, up from seven days in early February. Warehouses of PE producers’ inventory were filled to the brim and around 64% of them had to cut run rates, resulting in some 250,000 metric tons of PE supply loss this month, according the IHS Markit COVID-19 Weekly Focus Report.

On PE demand, however, travel restrictions meant that migrant workers were unable to return to the factories. Operation rates at PE converters will remain subdued, and demand loss stemming from low run rates or plant closures is estimated at 2.5 million metric tons (MMt) in February. However, as China domestic PE prices are at a record low, IHS Markit expects converters to replenish their feedstock and boost consumption by almost 1 MMt. The very attractive PE price will also increase demand for virgin PE over recycled PE. As such, the net demand for virgin PE will be further reduced to 600,000 metric tons, down from 2.5 MMt.

Consumption of monoethylene glycol (MEG), a fiber intermediate, has declined by at least 20% compared with a month ago as polyester units stayed shut after the two-week extended Lunar New Year holiday since employees were unable to return to work due to transport curbs and travel restrictions. With these restrictions easing, resumption of operation is expected to slowly recover. Significant cuts in other derivatives such as ethylene dichloride (EDC), vinyl chloride monomer (VCM), and styrene are adding to ethylene supply pressure.

Unlike ethylene, mainly produced at naphtha crackers, propylene can be produced at refineries or on-purpose units, which make up around 42% of China’s total propylene output. Operation rates at these units were at 85% in January but fell to 70% by the third week of February, resulting in an estimated production loss of 588,000 metric tons. The propylene spot price has fallen to $760/metric ton CFR Northeast Asia on 20 February, down $125, or 14%, compared with 23 January.

Downstream polypropylene (PP) capacity loss is expected at 450,000 metric tons in February as more than 50% of Chinese PP producers have cut run rates. PP inventory had risen to almost 20 days in mid-February, up from eight days at the beginning of the month, according to the COVID-19 report. Logistic issues continue to hurt the industry as producers were unable to ship their products to the market because of travel restrictions.

Hubei province, the epicenter of the COVID-19 epidemic, is a major automotive manufacturing hub and PP is used in light, medium, and heavy vehicle parts. The cessation of automotive production has a direct impact on PP demand.

While converters have restarted since 16 February, many factories are still waiting for migrant workers to trickle back from their hometowns.

On a more optimistic beat, PP is also used in the manufacturing of masks, aprons, and syringes. Demand for these medical products has increased sharply since the virus outbreak but as these are very lightweight products, the demand surge in this sector cannot compensate for the loss in other sectors, according to the report.