H2 Outlook: Global propylene supply to remain healthy on extra capacity, strong inventories

As supply improved, alongside a slowdown in derivatives demand, global propylene spot prices fell this year from the multi-year highs seen in 2018, and the US market has taken the steepest dive.

US propylene supply has recovered in the first half of 2019, as production from propane dehydrogenation units has improved. This was in line with expectations for the front half of the year, and eventually led to record high inventory levels of 6.459 million barrels in March, according to the US Energy Information Administration.

Trade participants have said this is something they expect to continue for the remainder of the year.

Inventory levels have gradually come down since March, but are still well above inventory levels a year ago. At the end of June, US inventories stood at 4.960 million barrels, compared with 2.324 million barrels at the end of June 2018. Market participants have said stocks should build again following mid-year turnarounds at some heavy cracker units. But sources added that all three US PDH units are still expected to have see type of turnaround between October and February 2020.

The overall increase in inventories has pressured US propylene spot prices, leaving them well below 2018 levels. Polymer-grade propylene spot prices hit a low of 32 cents/lb ($705/mt) FD USG in late February before rebounding and then receding again to 32 cents/lb FD USG in mid-June.

US EXPORTS INCREASE, BUT ARBITRAGE TO EUROPE CHALLENGED IN H2

As supply length pushed spot prices to levels not seen since the end of 2016, US propylene exports have increased through the first four months of 2019, according to data from the US International Trade Commission. Volumes mainly headed to Latin America, and market participants have said they expect this to continue throughout 2019.

Europe has also seen an increase in shipments of US molecules as players anticipated supply tightness amid a heavy steam cracker turnaround schedule in the second quarter.

According to Eurostat data, imports from the US in the first four months of 2019 averaged 13,600 mt/month, compared with 920 mt/month in the same period in 2018. Meanwhile, imports reached an all-time high in February of 63,760 mt, the data show.

Since the beginning of 2019, Europe polymer grade propylene has traded at a premium to other regions before falling below $1,000/mt FD NWE, close to levels in Asia and narrowing the gap with the US.

With that recent relative weakness, market players have started questioning if arbitrage opportunities still exist, already anticipating a decline in imports from the US.

The premium of the European PGP spot price over its US equivalent was calculated at between $150/mt and $200/mt at the beginning of July, meaning the arbitrage was closed on paper.

“The arbitrage has been challenged, but from a volume perspective there is enough propylene for July and August,” one European player said.

However, more planned maintenance is expected in Europe between August and October, meaning supply could turn tighter if the current trend continues.

ATTENTION IN ASIA TURNS TO NEW CAPACITY

Meanwhile, the Asian market will focus on startups, with more than 1.2 million mt/year of extra propylene production capacity expected to come online in China by H2.

This includes China’s Fujian Meide Petrochemical’s 660,000 mt/year PDH plant in September and Dongguan Juzhengyuan’s 600,000 mt/year PDH plant by the end of H2. The additional capacity could reduce Chinese reliance on imported cargoes and exert pressure on spot price.

“We imported 600,000 mt of propylene feedstock for our two 500,000 mt/year polypropylene plants last year and will reduce the imports by 400,000 mt once our PDH plant is operating at full rate,” said a company source at Fujian Meide Petrochemical.

As for the rest of Southeast Asia, Northeast Asia and South Korea, there will be less turnarounds in H2 compared with the front half of the year, ensuring a relatively stable supply of propylene, especially in the final three months of the year. Three steam crackers in the region with a total propylene capacity of over 1.5 million mt/year were heard to have plans for turnarounds in the current quarter. Chandra Asia, the major player in Indonesia, is expected to shut down its cracker for turnaround by August 1, while Formosa Petrochemical’s No. 2 steam cracker unit will carry out scheduled maintenance by mid-August. Lotte Chemical is scheduled to shut its Daesan cracker by October 14.

Other market participants were keeping a close watch on the Malaysia’s Petronas-Aramco RAPID project, which has experienced delays in the startup of the cracker and refinery. The complex’s RFCC is now scheduled to produce 600,000 mt/year of propylene by the end of Q3, but is only due to produce on-spec propylene in Q4, according to a source with direct knowledge of the matter.

— Lara Berton, Lara.Berton@spglobal.com

— Edited by Keiron Greenhalgh, newsdesk@spglobal.com