Petrochemicals - Product spread still weakening

Product spread still weakening

Petrochemical product spread continued to weaken in the past week, due to higher naphtha price (+1% WoW) with product prices little changed from the week prior. The latest stimulus package in China may boost investor optimism in the near term but the actual impact on demand in the longer term amidst persistent supply gluts is uncertain. We recommend investors remain cautious in short-term trading in the sector although their valuations are at -2SD of 5-year average PBV multiples.

Average PE/PP spread down WoW on higher naphtha cost. Despite steady PE/PP product prices, average PE/PP spread fell 2% WoW to US$380/t on a 1% WoW rise in naphtha cost. Excluding LDPE, average spread slid 2% WoW to US$327/t vs. cash cost of US$350/t. This suggests the demand-supply imbalance continues to hold back PE/PP spread to US$300/t± vs. the average of US$600/t

in 2Q20-2Q22. Average PE/PP spread (ex. LDPE) in 3Q24TD is down 2% QoQ to US$330/t, hurt by a 2% drop in price QoQ despite lower naphtha cost. Volatile oil price amidst low seasonal demand in 4Q and uncertain demand for 2025 will continue to deter inventory replenishing.

Benzene spread sinks to 9-week low. Benzene spread fell 6% WoW to US$287/t vs. 12MMA of US$313/t as benzene price fell another 1% WoW on slower demand in China ahead of Golden Week in early Oct. Uncertain demand continues to keep buyers from replenishing inventory although China’s government has stepped up incentives to encourage consumers to replace old home appliances with new ones, offering subsidies of up to 2,000 yuan ($280.28) for each item in a bid to expand domestic demand and stimulate the internal growth. (Global Times) The incentive did raise demand for benzene, the upstream feedstock for ABS and PS, used in appliances, earlier

this year. PX spread also fell 3% WoW to US$252/t, the lowest since Feb 2021, reflecting weaker downstream demand and excess PX supply. Also, demand from PTA plants in China fell due to plant shutdowns caused by bad weather.

PET price at new 2024 low. PET bottle chip price fell 3% WoW to its lowest since Jan 2021 at US$830/t (-12% from 2024’s peak) vs. 12MMA of US$912/t on bearish sentiment amidst lower oil price and supply additions in 2H24. Integrated PET spread nosedived 20% WoW to US$125/t, still above 12MMA of US$108/t, as feedstock prices continued to slide. Apart from slower demand in off-peak season that will depress integrated product spread in 4Q24, we believe PET bottle chip price cuts by Chinese operators will continue to dampen market price. Average spread in 3Q24TD is up 24% QoQ to US$121/t, still much below the 5-year average of >US$250/t.