OUTLOOK' 20: Increasing import supply to bludgeon SE Asia PE market further

Southeast (SE) Asia polyethylene (PE) market is likely to remain under pressure in 2020 as demand growth continues to trail behind growing regional and global supply.

Although there is relatively limited PE capacity expansion within SE Asia region, import PE supply is expected to increase year-on-year amid start-up delays in 2019 and a slew of new plants startups in 2020.

2019 expansions saw around 4.5m tonnes of additional PE volumes, mainly from the US, while 2020 will see approximately another 7.2m tonnes of linear low density polyethylene (LLDPE) and high density polyethylene (HDPE) grades.

Asia is leading the capacity expansions in 2020, with more than 4m tonnes of additional volumes, mostly for LLDPE and HDPE grades from China alone, a big jump from the mere 900,000 tonnes PE expansion in the country in 2019.

The other bulk of additional volumes will arise from emerging PE export regions such as Russia and Oman with around 1.5m tonnes/year and 880,000 tonnes/year production capacity respectively, as there is no planned capacity additions from the US.

SE Asia market has largely been weighed by bearish sentiment amid sluggish end product demand, which might continue to plague the market in 2020, as demand growth is unable to catch up to a surge in supply.

ICIS estimates demand growth for PE in SE Asia to average at around 5.5% in 2020, although prolonged uncertainty surrounding the China-US trade tension and rising environmental concerns on plastic waste might undermine the real demand.

Most converters might refrain from building up on their inventories and opt to rely on their contract volumes for their immediate requirements should weak market conditions persist in 2020.

Traders and stockists are also likely to adopt a cautious position and refrain from committing to big spot allocations, opting to hold on to minimum volumes and ready stock levels.

SE Asian producers, particularly the naphtha based and non-integrated PE producers, are currently grappling with narrow to negative margins, amid weak PE market against relatively firm feedstock naphtha and ethylene costs.

Import prices across all PE grades in southeast Asia hit new lows in 2019, the lowest levels seen since 2008 economic crisis amid supply pressure, as the prevalence of US materials shakes major markets.

Offers for dutiable US origin PE cargoes, particularly for LLDPE and HDPE cargoes were consistently around $20-50/tonne lower as compared to other offers from regular Saudi, Middle East and Indian suppliers.

Dutiable HDPE prices largely softened throughout the year, converging and eventually falling below LLDPE prices in early December 2019.

The price gap between the US and Middle East origin HDPE cargoes narrowed in recent months amid increasing sales pressure, with some Middle East producers matching the prices of US-origin cargoes.

Vietnam market is fast becoming the biggest import market in Asia, apart from China and Indonesia, due to its policy of zero duty for PE imports.

PE prices in Vietnam remain significantly lower as compared to other southeast Asian regions in 2019, particularly for LDPE and HDPE film.

For LLDPE, weak demand and competitive local prices, particularly in Indonesia, curbed import demand and suppressed import prices for non-dutiable southeast Asian cargoes.

The price gap between dutiable and non-dutiable LLDPE cargoes narrowed to a mere $25/tonne CFR SE Asia while that for HDPE film remains relatively wide at $80/tonne, ICIS data showed on 6 December 2019.

The typical price gap between dutiable and non-dutiable PE cargoes in SE Asia normally reflects the import duties involved for the respective grades but has not been the case in recent years.

Some naphtha-based producers in SE Asia might reduce their overall operating rates further amid squeezed margins should feedstock naphtha and ethylene costs remains firm in 2020.

Overall outlook for 2020 remains cautious with some risk of further downtrend across PE grades as increasing supply pressure in a saturated market might weigh down on sentiment and curb demand further.