Commodities 2021: China's styrene oversupply promises to weigh on 2021 prices

Singapore — The global styrene supply glut may escalate in 2021 as Asian capacity increases and uncertainty over demand recovery looms amid the ongoing pandemic.

Although Asian styrene prices surged in October on tight supply, it loses steam in early December as the restart of some regional producers added length to the market.

Improving margins and the re-opening of deepsea arbitrage late 2020 brought increased supply to the Asian market and inventories may build again before the Lunar New Year in February after falling to a relatively healthy level in the fourth quarter.

Asian styrene capacity growth surges

The expansion of China's styrene capacity in 2021 is expected to lengthen the market by approximately 6.88 million mt/year and exacerbate Asia's supply glut, while demand growth lags behind. It may potentially lead to output cuts. Among the new capacities coming on stream are Zhejiang Petrochemical's additional 1.2 million mt/year capacity, CNOOC Shell's 650,000 mt/year facility and Wanhua Petrochemical's 650,000 mt/year plant, industry sources said.

"In the face of over-competition, suppliers with good cost structure will have the advantage," a market source said.

Meanwhile, production losses due to heavy plant maintenance in first-half 2021 are expected to partially offset the supply length and may lend support to CFR China prices. This will also narrow the gap between CFR and domestic China styrene prices, dampening Chinese buyers' import interest.

China's healthy demand for home appliances and automobiles is expected to continue into H1 2021. As lucrative downstream margins and high operating rates persist, styrene buyers may consider other factors, not just prices, during procurement, a market source said. Among others, styrene buyers may even be willing to purchase prompt cargoes at higher prices.

India, Asia's second largest styrene importer, is likely to emerge from a supply shortage in mid-January, according to market sources. Deepsea US cargoes bound for Asia will seek homes in India once South Korea's supply returns to normal. South Korea's styrene supply has been disrupted since March following the unscheduled shutdown of the first of two upstream steam crackers.

However, the Indian government's order for styrene imports to undergo mandatory certification come May 2021, may give rise to regulatory issues. Nevertheless, the deadline for styrene exporters to meet the necessary quality specifications set by the Bureau of Indian Standards is expected to be extended.

North American market hinges on exports, pandemic

In the US, amid uncertain demand, market participants said feedstock benzene will determine the fate of spot US styrene monomer in the first half of 2021 after prices reached an 18-month high in November.

The pandemic is expected to impact polystyrene producers' operating rates, which received a boon from food service packaging amid changes in consumer behavior. US spot styrene prices will be heavily influenced by continued spot export shipments, market sources said.

While some traders worry the planned styrene production growth in China may threaten the global supply balance by spring 2021, plant turnarounds in South Korea, Taiwan, Japan and the Middle East could sustain Asian demand for US material well into the new year. Longer term, US traders believe non-integrated Chinese producers would be the most vulnerable, globally, to rate cuts or shutdowns in the face of high benzene prices and/or unsustainable margins.

European contract buyers seek greater discounts in 2021

Uncertainty is also in the writing for Europe's styrene monomer market in 2021 amid concerns over the COVID-19 impact and growing capacities in Asia.

Among others, discounts for contractual styrene, an annually negotiated percentage attached each month to the industry-settled styrene contract price in Europe, is still being discussed, with two different scenarios emerging. On the one side, these discounts are expected to remain steady, or even decline, due to styrene producers' slim profits in 2020.

Buyers, however, have pushed for greater discounts with opening bids discounted by as high as 25%, a trader said. This was spurred by increased volatility and a desire to move away from the contract price standard. While 25% is unrealistic, some settled contracts have discounts which had deepened by 1%-4% as buyers look for greater exposure to spot prices, another trader said.

Meanwhile, consolidation may be on the cards for Europe's styrene market, as additional capacity is poised to come online in China in 2021, market participants said. COVID-19 has disrupted the automotive sector significantly, as demand for new automobiles in Europe drop in line with lockdowns.

Polystyrene, however, has remained robust end-2020 due to demand from the packaging industry, while EPS producers remain bullish for the future as construction use grows.