A lack of demand in the petrochemical industry in Asia is forging new trade flows across the region. Siddharth Poddar reports.
Asia’s petrochemical industry is facing continued low demand for finished goods. According to Sriram Yadav, managing director at Sky Petro-Chem, a petrochemical trading company based in Singapore, demand, particularly from Europe, for a number of petrochemical products has softened by as much as 40% since early 2011.
“Some manufacturers have stopped buying bigger parcels from here,” says Yadav. These include all streams of polymers, polymer feedstock, glycols and paraxylene. In terms of downstream products, basic grades of products such as ethylene-vinyl acetate (EVA), low-density polyethylene (LDPE) and high-density polyethylene (HDPE) are still seeing decent demand.
However, demand for some special grades – key export items in terms of value – has reduced. Yadav refers to the slowdown in the automobile industry and its subsequent impact on the demand for polycarbonates that were exported mainly from the Middle East and Southeast Asia. While the demand for basic downstream products has remained constant, he explains that it only makes up about 30% to 40% of the value of downstream exports from the region.
Petrochemical product sales volumes are declining in Asian markets such as China and India as well.
Remco Jongkind, head of transportation Asia at ABN Amro, links the drop in the market within Asia to China’s economic slowdown. “There is definitely less cargo being imported by China,” he says.
In a market like India, on the other hand, while there is still demand for petrochemical products, businesses are not ready to import. This is largely for two reasons: the finished product market in India has slowed, and the currency has depreciated over the last year. “Demand has stagnated,” states Sky’s Yadav.
The market is also tackling a disconnect in the pricing of petrochemical products. “Upstream pricing is dependent on downstream,” says an executive at a large Asian trading company.
However, as a result of high crude and naphtha prices, upstream pricing is challenged. As such, while demand for downstream products and the subsequent demand for upstream products by downstream producers is low, upstream producers are not always able to reduce prices. GTR’s source expects that with better worldwide demand next year, this disconnect can be resolved.
According to Sky’s Yadav, some feedstock producers are downsizing their production capacities because the current pricing of downstream products does not allow upstream manufacturers to continue supplying. Margins for companies producing intermediates “have shrunk to the minimum possible numbers”, he says, and have come down to US$11-US$12 per metric tonne.
Even in the case of more downstream products such as LDPE, for example, margins have continued to drop. According to ICIS, a provider of global petrochemical market pricing information, in early August, margins were at their lowest since the company began keeping records in the year 2000.
The decrease in margins has to do with both the falling demand for finished products, which directly impacts downstream petrochemical product manufacturers, as well as the high naphtha prices, which have tended to overshadow the increase in the prices of downstream products including polyethylene variants. This disconnect between weak demand for downstream products and the high feedstock prices is a key challenge in the Asian petrochemicals industry today.
Evolving trade flows Companies are adapting to lower margins but seeking the same kinds of profit levels, which has meant they have had to try and increase their turnover significantly even to meet the same bottom lines. At the same time, Sky’s Yadav says, traders are not always getting the products they want to sell since availability has declined.
As such, firms such as his are diversifying their operations and are forced to look into other products that they have not traditionally trading in. Sky, for instance, initially only focused on upstream petrochemical products and intermediates, but is now looking into downstream products such as purified terephthalic acid (PTA).
There are also other factors leading to a change in trade flows. Jongkind at ABN Amro says that more petrochemical plants and refineries are being built in China, which will lead to a change in trade flows in and out of the country.
Import flows into China can be expected to change with China importing more crude cargoes going forward, as opposed to petrochemical products. “If the plants in China can produce different products, then they could both meet their domestic needs as well as potentially export petrochemicals,” he says.
More downstream manufacturing companies are trying to cultivate new markets as a result of sales volumes not recovering in the US and in Europe.
“I am seeing some trade flow to Bangladesh, Pakistan, the Middle East and Africa,” says Jongkind, adding that some petrochemical companies were not selling products to these markets before, but are now doing so to try and maintain sales volumes.
The search for new markets has had implications on trade financing requests. In May this year, Standard Chartered completed the first automated complete trade finance transaction via Bank Payment Obligation (BPO) for BP Petrochemicals.
Ashutosh Kumar, global head of cash and trade products at Standard Chartered says the bank is seeing “good interest” from companies in terms of BPOs.
In addition to the BP transaction, Standard Chartered is talking to a lot more clients in the petrochemical industry. According to Kumar, the BPO can potentially facilitate transactions for petrochemical and other companies as it offers both the efficiency of an open account transaction and the payment certainly of a letter of credit.
In general, the capacity for trade finance is good, he says, “and the best evidence for that is that pricing is moderated”.
Sky’s Yadav also believes the trade finance situation is relaxing now, compared to the second quarter when financing from the banks was “really tough”. Now, he says, banks are voluntarily coming to companies and proposing new financing facilities, “but they are being very selective and terms and conditions have become very stringent”.
One of the concerns for banks, however, is the possibility of a severe slowdown in markets such as China and India, says Masahiro Goda, regional head, Asia, global trade at Mizuho Corporate Bank. These concerns relate to counterparty risk and the length of payment cycles. Goda explains that some payment cycles are already becoming longer, although not yet drastically so.
He says the bank is cautious about India and China. “As demand is weak, our customers may need to take more inventory and that adds up to costs.”
Notwithstanding the challenges, industry insiders expect an upturn in the petrochemical market.
Jongkind says that ABN Amro’s analysts anticipate a recovery going forward, which is directly related to economic activity in Asian countries.
“As soon as production in China improves, it will have a direct impact on petrochemical cargoes,” he says.
Yadav expects an improvement in the first quarter of 2013, especially if China gets its house in order. While his order levels are very low for the last quarter of this year, they are already significantly better for the first quarter of 2013.