VINACHEM

Asia’s propylene oxide (PO) prices are likely to trend down in 2016, with losses expected to extend from where it left off in December, industry sources said.

Chinese import volumes will most likely stay subdued in the coming year as no new capacities are expected to come up in 2016, with the recent sharp devaluation of the Chinese yuan against the dollar since December last year likely to diminish buying appetite for import cargoes even more.

Chinese yuan’s continued depreciation against the US dollar since August last year is weighing heavily on the domestic import market and regional trade.

On 7 January, the central bank – the People’s Bank of China (PBoC) – set the official midpoint rate on the currency at 6.5646 yuan per dollar, the lowest since March 2011.

It was the currency’s biggest one-day move since July 2005, when Beijing started its exchange rate reforms.

The near term PO outlook in January is bleak as China domestic prices had fallen below the psychological CNY8,000/tonne ex-works (EXW) Shandong level in late-December – the first time in 2015.

Weakening crude oil prices coupled with the tumble in Chinese stock markets at the start of the new year added even more gloom to the already poor market sentiment.

However, further downside in domestic PO may be curbed as prices had fallen to close to key Shandong producers’ costs.

Demand for downstream polyols is expected to pick up after the week-long Lunar New Year holiday, which falls on 7-13 February in 2016.

Moreover, polyols producers are holding on to low stock inventory of PO amid the year-end lull and they may start snapping up cargoes when prices reach reasonably low levels from their standpoint, Chinese suppliers said.

Throughout the year, however, overall buying appetite for PO is likely to be stagnant given continued weakness in the Chinese economy.

Flexible foam grade of polyols, when combined with toluene di-isocyanate (TDI), find outlets in polyurethane (PU) foam for mattresses, furniture, automotive seats, while rigid polyols combined with methyl di-p-phenylene isocyanate (MDI) is used in refrigerators as well as insulation in the construction sector.

Peak demand for the material is during March/April, supported by a resurgence in construction activities, but market players are worried that actual consumption in 2016 will not be as strong as in the previous years.

In the mid-to-longer term, additional output from new Chinese PO capacities in 2015 besides the expected stagnant demand from the downstream polyols sector will likely weigh on PO prices, the sources said.

Wanhua Chemical started up its PO/methyl tertiary butyl ether (MTBE) plant, with a PO capacity of 240,000 tonne/year, in Yantai, Shandong province, in late July.

PO price movements have often defied market expectations in the past and remains one of the few petrochemical products that commands a reasonable margin under current poor market conditions.

Chinese plants are likely to target as high a run rate as possible and in the process may result in an erosion of the margins, whereby the phenomenon has been particularly prominent in the fourth quarter of this year.

Spot volumes into South Korea had been especially hit hard following the permanent closure of Japanese producer Nihon Oxirane’s (NOC) PO/styrene monomer (SM) unit, which had a PO capacity of 240,000 tonne/year, earlier in May this year.

In southeast Asia, the proliferation of integrated PU facilities in recent times also curtailed the availability of spot PO cargoes from the region.

Dow Chemical Thailand has had limited PO cargoes for sale in the commercial market after it started up its polyols plant in March at the site, with practically all of its PO being used captive for its polyols production.

With China domestic output expected to more than offset the reduction in import availability, downstream polyols prices will likely play a crucial role in determining the price direction of PO going forward.

Sadara Chemical’s impending start-up of its PO and polyols facilities in second-half 2016 will lengthen the polyols supply even further, albeit its PO will not be sold in the commercial market, according market sources.

The plant located in Jubail Industrial City, Saudi Arabia has a PO capacity of 390,000 tonne/year and polyols capacity of 400,000 tonne/year.

Sadara Chemical is a joint venture between US producer Dow Chemical and state energy firm Saudi Aramco.

Other notable upcoming polyols expansion plans include China’s Xinyue Chemical’s 200,000 tonne/year new unit scheduled to come on stream in first quarter 2016 and Wanhua Chemical’s 270,000-300,000 tonne/year new unit scheduled to come on stream in March/April 2016, market sources said.

Both the producers have their own PO facilities.

With little upward room for polyols prices to manoeuvre on the back of producers’ squeezed margins, PO prices are also expected to be suppressed, albeit at a lesser extent as compared to that of upstream raw materials such as crude oil and propylene, industry players said.