High Costs Begin to Take Their Toll on Asian Ethylene Produce

Implications: Japanese ethylene producers are beginning to reduce operating rates to adjust to market conditions.  Because of their relative high costs in Asia, Japanese producers are the marginal suppliers.  As they reduce production, we see the deepening of the trough hit Asia.

Analysis: To gauge the temperature of Asian ethylene and plastics markets, Japanese producers a good ones to watch.  Imported feedstock, high energy costs, high labor costs, high infrastructure costs, and below average economies of scale make Japanese ethylene producers marginal in the region.  Controlled markets for ethylene derivatives like polyethylene make domestic production and sales profitable and preferential to Japanese producers.  But competing in the export market is a different story.
 
A couple of weeks ago, a Japanese chemical trade association indicated that Japanese producers would ease out of the export market for polyolefins and just produce for the domestic market.  The article noted here indicates that Asahi Kasei (3407.T) will reduce operating rates at Kurasiki.  Another news item says Mitsubishi (4188.T) will delay the restart of its naphtha cracker at Kashima, effectively reducing operations.  

With naphtha at or above $1150 USD per ton (Singapore) and the spread between naphtha and polyethylene hanging below $700 per ton, naphtha-based Japanese producers are not profitable.  Many traders are reported to have pulled bids and offers from the market to watch from the sidelines as the market unfolds.  Natural gas based feedstock producers in Taiwan, Malaysia, and India can still compete in the Asian market, along with the growing Middle Eastern capacity.  But as demand softens, high cost producers in Japan first, then Korea, are likely to find offers unacceptable.  

Since the Japanese producers and associated trading houses have resources beyond Japan, their financial results are more likely to keep pace with the rest of the industry.  Korean producers, being less global, will have to count on higher prices for key exports like polypropylene to balance operating costs.