Asian petchems prices under pressure as US dollar strengthens, recession fears grow

The strengthening of the US dollar against key Asian currencies in March is putting petrochemical prices under extreme pressure, as fears mount that the coronavirus pandemic will trigger a global recession.

Most Asian petrochemical producers procure feedstock and condensate imports in US dollars, and the strong dollar is putting pressure on companies with high debt ratios, one trader said.

The US Dollar Index, which gauges the relative strength of the dollar against a basket of six world currencies, hit a record high 102.99 last Thursday amid tumbling global financial markets and growing fears of a recession. The index fell slightly to 100.91 Wednesday after the US announced $2 trillion stimulus package, but remained above the 100 mark as of Thursday.

The value of the US dollar is typically inversely related to energy and commodity prices.

"A stronger dollar often means lower commodity prices because as the dollar strengthens, the purchasing power of importers that buy commodities priced in dollars weakens," Shaun Roache, Asia-Pacific chief economist for S&P Global Ratings, said Thursday. "The dollar prices of the commodity falls to offset this weakening in purchasing power."

CHINA DOMESTIC PRICES HIGHER THAN IMPORTED

The spread between China's domestic and CFR China prices for petrochemicals has widened sharply as the depreciated yuan further dampens import buying interest.

As the local currency weakens against the US dollar, buyers increasingly opt for domestic rather than imported cargoes, typically pushing China domestic prices higher imports, widening the spread between the domestic import parity and CFR China prices. The dollar/Yuan exchange rate hit a record high at Yuan 7.1052 last Friday, S&P Global Platts data showed.

The domestic China benzene market was assessed at Yuan 3,000/mt Thursday, equating to $368.19/mt on an import parity basis, and the CFR China benzene marker at $343.50/mt. The spread between China domestic benzene import parity/CFR China has widened $16.20/mt on-month at $24.69/mt on Thursday, which illustrates the domestic China benzene demand is relatively firmer than the imported cargoes.

Downstream, the prompt marker of domestic styrene monomer was at Yuan 4,490/mt ex-tank Thursday, equating to $551.06/mt on an import-parity basis, and CFR China at $545.50/mt Thursday. The spread between China domestic SM import parity/CFR China SM has flipped into positive territory this week, rising $15.27/mt from minus $9.71/mt last week, or $1.49/mt on the month, Platts data showed.

High inventories in China were also discouraging imports, market sources said. Inventories of styrene monomer were around 227,000 mt as of Thursday, up 5.8% from a month earlier, Platts data showed..

PAYMENT DELAYS

In Southeast Asia, traders said payment delays were starting to occur from small end-converter enterprises and fears of defaults were growing.

"Now the [Indonesian] rupiah has risen [more than] 4.5%, I can't even cover my cost," said an end-user who regularly imports toluene and solvent-MX

Asian high density polyethylene prices hit a 15-year low at $790/mt CFR Southeast Asia, Wednesday, down $20/mt week on week, according to Platts data, as the coronavirus pandemic batters demand. HDPE prices were last at this level in January 2004.

Other end-users were struggling to complete deals as they had borrowed the funds for their US dollar purchases at higher interest rates in other currencies.

"The Indonesian rupiah, Indian rupee and the Philippines peso are especially exposed, in part because these economies rely on foreign capital inflows to fund current account deficits," Roache said. "Their capital markets often suffer from thin liquidity, so even moderate capital outflows can have large price effects."

Demand destruction caused by the coronavirus pandemic and the Saudi Arabia-Russia crude oil price battle for market share were expected to keep the currency exchange rate volatile.

"It isn't uncommon to see dollar hoarding as concerns grow about the availability of financing," Roache said.

The US dollar is used in a wide range of global financial transactions, including commodity pricing, treasury issuance, and bank loans, a trader based in India said with adding, that is why the demand for the dollar tends to be higher, whenever there are fears on economic downturn.