Chinese MTBE producers face rising feedstock costs amid supply disruptions

Chinese MTBE producers are bracing for higher feedstock costs in the near term due to term supply disruptions, producers and traders said Feb. 27.

Key supplier Saudi Aramco suspended shipments of LPG from its Juaymah terminal in Ras Tanura "for the next few weeks" after part of its export infrastructure was damaged, it said in a statement Feb. 25.

With prompt-term supplies in jeopardy, Chinese producers may have to seek higher-priced spot butane cargoes instead to sustain production, some producers said.

"Yes, March LPG volumes of 450,000 mt will be affected [and] trade shifts will happen," an MTBE producer in the Straits said.

Chinese producers, already operating on slender margins, may find it challenging to absorb higher-priced spot cargoes.

"Our raw material costs have risen by over 10%," one domestic producer said, while a second domestic producer said the current margins were "negative".

Recent margins for producers in the Shandong region averaged around minus Yuan 109/mt, a Chinese broker said.

A third domestic producer echoed similar views, adding that the plant may have to consider reducing LPG imports in March.

"We will try to avoid purchasing imported LPG, but for the MTBE unit, the costs were high in March," the third producer said.

After the Lunar New Year holidays, market participants expected higher Chinese production as sellers look to cash in on potentially stronger demand from the West, while festivities in Southeast Asia could further soak up inventories and boost prices.

But with higher feedstock prices, some producers may limit production until the situation normalizes.

"Maybe need some time [to raise production]. Butane is too expensive [and] need to buy spot [cargoes]," the second Chinese producer said.

The second producer added that their plant was shut down a few weeks ago due to poor margins on account of higher feedstock costs.

The impact is felt mainly by standalone and smaller MTBE producers rather than the Chinese majors.

"We are [a] mega independent refinery and MTBE is just a byproduct," said a Chinese producer, signalling minimal impact from supply interruptions.

The third producer said that MTBE production may have to rely on domestic Chinese LPG to avoid a sharp drop in supplies.

"We have some alternative resources in South China. In the north [of China], the [LPG] supply is tighter as there are many buyers, while it is more relaxed in the south," the third producer said.

Producers aim for higher prices

The ongoing US-Iran tensions continue to fuel uncertainty as the risk of war breaking out remains high, which could further raise the prices of key feedstock such as crude oil and butane, traders said.

"Quite a few [exporters] were discussing this already. They are expected to price their cargoes higher [due to] war risk plus escalating feedstock costs," a trader in Singapore said.

With feedstock prices rising in the near term, producers are hoping to pass on the costs to buyers instead.

Demand for Chinese-origin cargoes remains firm with several recent shipments sold to buyers in Europe and Latin America, traders said.

Earlier this week, a few April loading MTBE cargoes were heard sold at around $670-$680/mt FOB China, some traders in Singapore said.

While Latin America and Europe continue to eye Chinese MTBE, buyers are hesitant to pay very high prices.

At the Feb. 26 close, Platts, part of S&P Global Energy, assessed the FOB China marker down $1/mt day over day at $679/mt.

"Yes, a lot [of feedstock] cost pressure. If the buyer cannot take a higher price, producers may have to turn down [production]," a fifth Chinese producer said.

Meanwhile, a second Chinese broker suggested the term pricing basis a bigger problem for domestic MTBE producers as Chinese excess capacity remains.

"It's just that all [LPG term] settlements are based on Saudi Arabia's CP [contract prices]. Therefore, the pricing will definitely be affected," the broker said.

Platts assessed FOB Arab Gulf propane at $550/mt on Feb. 26, up $15/mt day over day, while FOB Arab Gulf butane was assessed $17.50/mt higher at $545/mt over the same period.