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Asian propylene’s length seen set to deepen 2016 term discounts

Asian propylene term contract discussions for 2016 are likely to conclude at larger discounts than this year due to an increase in supply in the region, market sources said this week.

A source at a producer in South Korea estimated the discussion range for 2016 term contracts at a discount of $10-$15/mt to CFR Northeast Asia publication prices. Other sources put the range at a discount of $9-$20/mt.

This is lower than the differentials negotiated for 2015 term contracts, which were heard to have been concluded at minus $5/mt to flat for contracts concluded in January or February and flat to plus $5/mt for those concluded in April or May, some market sources said.

Other sources said they had heard of term contracts concluded in the range of minus $10/mt to plus $10/mt.

A trader in South Korea said the bulk of this year’s contracts were concluded in early January.

The deepening discounts for 2016 follow an increase in propylene production capacity in Asia this year.

An additional new plant startup in the first half of next year is expected to tip the balance even further on the supply side. SK Advanced, a joint venture between SK Gas and Advanced Petrochemical, plans to start trial runs at its new 600,000 mt/year propane dehydrogenation plant at Ulsan in South Korea in H1 2016.

In 2015, around 2 million mt/year of new propylene production capacity started up.

In China, Oriental Energy started up a 600,000 mt/year PDH unit at Zhangjiagang and Yantai Wanhua Chemicals a 750,000 mt/year PDH plant in Shandong, while in South Korea, Hyosung Corp. started up a 300,000 mt/year PDH plant in Ulsan and YNCC an olefins conversion unit in Yeosu that can produce 140,000 mt/year of propylene.

Most of the new plants came online in the second half of 2015, contributing to weaker prices, which depressed production margins and in turn prompted PDH and OCU operators to cut run rates.

Japan’s Mitsui Chemicals shut its 140,000 mt/year Osaka OCU in October and South Korea’s YNCC its 140,000 mt/year OCU in November.

OCU RUN RATES UNDER PRESSURE

A source at a producer in Japan said OCU operators’ run rates could face further pressure in 2016 if firm ethylene prices squeeze margins. Lower production at OCU plants may see OCU operators having less impact on the propylene balance next year, he said.

“PDH [producers are] more competitive than OCU,” he said, adding further pressure on OCU makers.

Japan’s Asahi Kasei plans to permanently shut its Mizushima steam cracker in February 2016, which can make 470,000 mt/year of ethylene and 300,000 mt/year of propylene. An end-user in China said this would tighten the ethylene market, potentially resulting in higher run rates at other steam crackers and adding length to the propylene market.

A source in China said the country’s downstream demand may not be strong in 2016 and his company was studying the potential for exporting propylene if supply in China moved into surplus.

“[They] must find a way out,” said the source, adding that one way could be to export propylene to Southeast Asia.

A producer in Japan said another option in the face of oversupply in Asia could be to export volumes to South American countries like Colombia. Some suppliers had exported propylene from Asia to South America in January this year, he said.

A trader in Southeast Asia said he had shipped 7,000-9,000 mt to Colombia and another 7,000-9,000 mt to Mexico in the first quarter, with freight costs in the low $200s/mt range.

The US was an unlikely export option due to the weak propylene market and lack of infrastructure there, the producer in Japan said.

Market sources said 2016 may see an increase in spot market activity, in part due to the increase in supply.

A trader in Southeast Asia said he expected most market participants to commit less volume on a term basis next year than in 2015.

A trader in South Korea said that if the discount was too great, fewer term volumes were likely to be offered as most players would prefer to sell on a spot basis.

“CFR Northeast Asia at minus $20/mt means that they have to sell lower than the market price. [In the spot market], it is possible to sell on CFR Northeast Asia value,” he said.

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