North Asia petrochemical makers eye China demand recovery to help resuscitate margins

China's petrochemical sector is expected to strain under operating losses, at least through the third quarter, though propane dehydrogenation plants' negative margins since fourth-quarter 2021, are easing as import costs of propane feedstock have fallen by a quarter from the peaks in March, traders said.

Other North Asian naphtha cracker operators, which have also been reeling under poor olefin margins, are hoping for a recovery in propylene demand in China and other Asian buyers, to help draw down excess PP stocks in key producers such as South Korea, traders said.

"This current market situation is from high prices of naphtha to make olefins, but even if the price is lower, demand from Asia is still not good at the moment," a South Korean trader said, adding that whether the bleak outlook would last into Q4 depends on a recovery in China, where processing losses are showing signs of narrowing.

Chinese PDH plants are estimated to have suffered a loss of around Yuan 600-900/mt recently, improving from deeper losses in June, industry sources said.

The theoretical processing loss for Chinese PDH plants to process propane into propylene was estimated at around Yuan 1,627/mt ($242.91/mt) in June, S&P Global Commodity Insights estimates showed.

"The decline in propane import costs have helped ease the processing loss a bit," an industry analyst said.

Platts CFR North Asia propane averaged $731.05/mt in July, down from $771.14/mt in June. Average prices have been falling since reaching an eight-year high of $933.04/mt in March, S&P Global data showed.

With the recent weakness in ICE Brent crude futures, Platts CFR North Asia propane continued to fall and averaged $697.33/mt so far in August.

"If crude prices go lower, maybe margins will be positive," another Chinese trader said.

Front month ICE Brent crude futures were hovering below $95/b during Aug. 5 morning trade in Asia from almost $133/b on March 9.

Similarly, Platts physical C+F Japan naphtha cargo assessments averaged $785.11/mt in July, down from $822.89/mt in June, S&P Global data showed. Naphtha prices have also been on a downtrend since March after hitting a high of $1,158.63/mt on March 7.

Apart from prospects of improving propane demand, should margins started to gradually recover, Chinese imports have been stirred by new plants starting up.

China's Liaoning Kingfa Science & Technology Co. Ltd. is on track to commission its 600,000 mt/year PDH facility around end-September and has recently bought 23,000 mt of propane for H1 Sept. delivery, from major PDH operator Wanhua Chemical.

This will add to the 18 operating PDH plants with a combined propylene production capacity of 11.02 million mt/year and require up to 13.22 million mt/year of propane feedstock when at full operations.

Chinese crackers have also cut operating rates to reduce losses, and are running at about 75%-80% of capacity in August, data tracked by S&P Global showed.

Platts CFR China propylene poly grade to naphtha spread was at $177.75/mt at the Asian close on Aug. 4, up $34.50/mt on the day, S&P Global data showed.

It remains below breakeven levels of $250-$300/mt to produce propylene, market sources said. It was last above $250/mt on April 26 at $276.50/mt.

Lower runs at crackers

"Crackers will have to decrease run rates from September to October because their requirement for naphtha is getting lower," a source at a North Asia-based cracker said. "Either that or bring forward their maintenance schedule to reduce losses."

Even with falling naphtha prices, the bearish sentiment is set to persist until the end of the year and any imminent recovery is highly dependent on olefin prices and China's recovery, market sources said.

Domestic demand for olefins in China, South Korea and Taiwan has remained weak due to slowing economic growth and while crackers look to export their output, high freight rates and poor global demand stop them from doing so, the sources added.

So far, the economic outlook in China remains mixed. China's manufacturing PMI fell to 50.4 in July from 51.7 the previous month, lagging market expectations of 51.5 for July but above the 50-point index mark that separates growth from contraction. Market analysts said the drop resulted from weakened economic activities in various industries in China, keeping them cautious about demand recovery.

However, China's Q3 GDP growth of 4.9% puts its economy back on an expansionary track, which analysts said makes it one of the very few countries to record positive growth amid the COVID-19 pandemic, even as the country persisted with its zero-COVID policy, which has led to lockdowns in some parts.

"We cannot expect a rebound in a short time because it is a global situation," a Northeast Asia-based trader said, referring to prospects that a Chinese recovery could lend demand support to the struggling North Asian petrochemical sector. "European olefins are weak and US olefins are weak due to the soaring prices of ethane."