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China's new PDH plants face up to Asian propylene glut

Highlights

The startup of two more propane dehydrogenation plants in China by mid-2015, coming on the heels of the four facilities that have begun operations over the past year, will exacerbate Asia's propylene glut and likely force the newcomers to curb output to defend their margins, according to industry sources.

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Some of the new plants may also be forced to continue reselling their contracted propane cargoes, in the hope of capitalizing on steady prices for offloading unwanted the feedstock during the winter (November through February), sources said.

In total, the six new PDH plants will be able to produce 3.51 million mt/year of propylene.

Yantai Wanhua Polyurethanes is set to start up China's single-biggest PDH plant, located in Shandong province, next January or February, according to a source familiar with the matter.


The new plant will be able to produce up to 750,000 mt/year of propylene and will consume up to 900,000 mt of propane and 600,000 mt of butane annually.

The company had scheduled to commission the plant in December, though the source said the early-2015 startup is still in line with its original plan.

The jetty for the facility is ready and the giant storage cavern with a 1 million cubic meter capacity is set to be completed in December, he said.

The source added that Wanhua's first cargo will be pressurized LPG for gassing-in purposes at the plant.

Other industry sources said the company has bought its first propane cargo for early-January arrival.

Oriental Energy now aims to start its 660,000 mt/year PDH plant in Jiangsu province around end-2014 or early-2015, according to another source familiar with that project, though others said the plant may not start until mid-2015.

It had previously planned to launch phase one of the facility in the second half of 2014, a company source said in April.

The most recent startup, the 450,000 mt/year Shaoxing Sanyuan Petrochemical plant owned by China's top propylene importer, has been producing chemical-grade propylene since September 12.

It is unclear if the plant is producing polymer-grade propylene yet, although a company source had said it was due to start last week.

PDH PLANTS RESELLING PROPANE

Sanyuan Petrochemical had aimed to start its plant in Q4 2013, and due to the delay it has been reselling one 44,000 mt propane cargo a month from its term contracts with US exporter Targa and Petredec since February this year, including one earlier this month, according to trade sources.

Now that it has started operations, traders are watching to see if it also offers November- and December-delivery cargoes or if it continues to run at reduced rates due to low cracking margins.

Sanyuan's PDH plant is currently operating at 60% of capacity, according to sources.

The three other PDH plants in operation are currently running at a maximum of 80% and low cracking margins may well keep them below that level.

"Probably the PDH plants might limit their operating runs. They will make a judgment whether the profit of reselling the cargoes can cover the cost of lowering the operation ratio," one Chinese industry source said.

Tianjin Bohai Chemical Industry Group, China's first PDH plant which started production last October, was hit by lightning and shut for two days at the end of August.

Sources said it would take time for the plant to be heated up to the required temperature for normal operations to resume.

Now that margins are squeezed, it may not be in a hurry to crank up rates and may opt to resell contracted propane cargoes during winter, they added.

This could explain why Tianjin Bohai earlier this month resold a 44,000 mt propane cargo to Japanese trader Astomos at an $80/mt premium to the Saudi October Contract Price, for H2 October, CFR. Tianjin has resold two other cargoes since February, sources said.

This week, Tianjin Bohai is re-offering a prompt 43,000 mt cargo, comprising 30,000 mt of propane and 13,000 mt of butane that is due to arrive at its port around H2 September, due to lower runs at its facility, a source close to the plant said Monday.

It seeks to offer at $910/mt, while the CFR South China price for a mixed cargo was assessed Monday around $833/mt.

Analysts said PDH plants may face difficulties reselling propane to a market inundated with US, West African and Algerian supply, while North Asian demand has been tepid.

"Tianjin Bohai Petrochemical is running at a low run rate recently. As a result, they could not consume all their imported LPG arrivals, which have been bought under a term contract and will be delivered on a monthly basis," the source said. He could not reveal the actual operating rate.

But some Northeast Asian traders and a propylene end-user said last week Tianjin Bohai's plant might have again been shut Wednesday due to a glitch.

Company officials could not be reached for comment and no details were known.

Despite slow buying interest in the propylene market at the end of last week, there was some demand in northern China, particularly in Tianjin due to the Tianjin Bohai shutdown, various market sources said.

One propylene end-user said the PDH plant was expected to restart early October, though a trader said Monday the plant restarted September 25, a day after the outage.

Zhejiang Satellite Petrochemical Co. started test runs at its plant in Jiaxing in early August, while Ningbo Haiyue New Material Co. began production in July, after receiving its first propane cargo end-June.

A source said Ningbo Haiyue PDH is running at 80% of capacity and despite current low margins it may have to raise rates.

"Haiyue is under pressure to run at a higher ratio because their raw material propane will arrive soon. They have to reduce their [propane] tank capacity," the source added.

PROPYLENE UNDER STRESS

Aside from the startup of China's PDH plants, propylene prices are expected to extend the bearish streak seen since August until the end of the year, following the indefinite closure of Lee Chang Yung Chemical Industry Corp.'s 400,000 mt/year polypropylene plant in Kaohsiung, Taiwan, after an explosion damaged a pipeline.

LCY's feedstock supplier, CPC Corp., as well as Formosa Petrochemical Corp., are expected to offer the surplus propylene to China through the fourth quarter, exacerbating the glut on the mainland, traders said.

North Asian propylene prices have taken a pounding, with Platts FOB South Korea assessments down $120/mt since August 1 to $1,295/mt and the CFR China assessment down $125/mt to $1,345/mt over the same period.

At the same time, propane has held firm since July. Although CFR Japan prices have fallen a bit over the past month, to more than six-week lows of $807/mt for propane and $842/mt for butane, levels have held above $800/mt.

"The cracking margin from propane to propylene is bad recently, as the propylene price kept falling, while the cost of propane did not follow the trend. The situation has squeezed cracking margins," a source at a PDH plant said.

According to calculations by JYD Commodities Hub, PDH plants' margins have crunched to Yuan 300-500/mt ($49-$81/mt), down from as much as Yuan 900/mt in mid-2014. Margins are much lower than the PDH plants' forecasts of Yuan 1,000-2,000/mt, said a JYD analyst.

In East China, some Sinopec refineries sold propylene at around Yuan 9,550-9,800/mt on an ex-refinery basis Monday, down from Yuan 9,750-10,000/mt last week, JYD data show.

Some PetroChina refineries in northeast and northwest China sold at Yuan 9,400-9,700/mt Monday, steady to last week, JYD data show.

--Ramthan Hussain, ramthan.hussain@platts.com
--Pamela Sumayao, pamela.sumayao@platts.com
--Edited by Alisdair Bowles, alisdair.bowles@platts.com