Consultancy Chemical Market Analytics (CMA) said recently that polyolefins prices, made up of polyethylene (PE) and polypropylene (PP), may have already touched their lows, with an upcoming price recovery in 3Q23F possible.
“Based on Bloomberg data, PE and PP prices, as well as monoethylene glycol (MEG) prices, were at/below their late-2022 prices in mid-Jul 2023, with the short-lived 1Q23 price rally giving way to sequential falls in 2Q23 due to active destocking activity by manufacturers as a result of poor consumption end-demand globally,” said CGSCIMB in the recent Company Flash Note, stating a Target Price of RM5.68 and maintaining the Reduce call.
However, CMA believes that Chinese restocking demand may happen in 3Q23F, in preparation for the year-end holiday shopping season. Unfortunately, CMA is not optimistic that PE and PP prices will benefit much due to the excess global production capacity and the overall weak demand situation.
“In other words, this could be an L-shaped outlook, in our view, unless producers cut back their plant utilisation more aggressively, or demand picks up convincingly,” said CGSCIMB.
Going back to 2019, CMA had then projected polyolefins capacity growth in 2020 to overwhelm demand growth, but that pessimistic projection was premature, as multiple unexpected events intervened. This included:
1) Delays in new plant start-ups.
2) The Covid-19 pandemic in 2020-21 that lifted global trade in merchandise and increased the use of single-use plastics.
3) Hurricane Laura and Winter Storm Uri that severely impacted PE/PP output in the US Gulf of Mexico.
4) The logjam in container shipping during the pandemic that prevented the US from exporting its excess production.
Due to the above factors, effective plant operating rates rose to more than 90% in 2021 and into 2022. However, after years of capacity expansion in 2020-2023, supply is finally catching up, and demand is weak in the face of inflation and rising interest rates.
CMA expects global plant operating rates at around 81% for PE and 78% for PP, the lowest in decades. This is reminiscent of the post 2008-09 Global Financial Crisis period when PE utilisation rates averaged 83% from 2008 to 2013, while PP utilisation was at 84%.
According to CMA, Chinese PE demand grew by only 2.5% in 2021 and 1.4% in 2022; with sub-5% growth likely the new normal going forward, compared to the 10% annual growth levels between 2015 and 2020. US and Canada PE demand may fall 4% this year, while Europe demand may be flat.
As China produces more of its polyolefins domestically, it will import less, and exporters from South Korea, Taiwan and Japan will export to other regions instead.
Container shipping congestion has eased, and because of the weakness in the North American demand, CMA expects the US to increase its PE exports by 23% in 2023, on top of 25% growth in exports in 2022. This is significant because North America is a major producer and exporter.
As for urea and ammonia, consultancy ICIS noted that European utilisation of its plants have risen from 40% in the aftermath of the Ukraine war to 70% in Jun 2023 due to lower gas feedstock prices, while Indian demand remains low given the high Indian urea stockpiles.
Also, the Chinese are exporting 36% yoy more urea during 1H23 at low prices. According to ICIS, urea prices are close to the bottom as many producers are not able to price lower. But for now, we are unsure of what event will lift urea higher.
“Separately, CGSCIMB believes that Petronas Chemical Group (PCG) has been selling polymers from Pengerang at below market prices in order to clear output during the ongoing commissioning phase. This could accentuate PCG’s commissioning losses in 2Q23 and 3Q23, in our view. Upside risks include consumer demand recovery in China and other developed markets,” said CGSCIMB.
