Domestic polymer producers increased prices (especially of polyethylenes and polypropylene, in two phases -- early September and mid-September -- by around 11-19 per cent, in response to the increase in the international prices. As a result, operating margins of domestic integrated crackers producers are expected to improve substantially in the third quarter of 1999.

International prices have been improving since August 1999, due to a sharp increase in the prices of olefins and naphtha, and a recovery in Chinese demand from the July levels. Ethylene prices have increased by nearly 60 per cent since July 1999, to around $610-620 per tonne in early September 1999.

Propylene prices have increased by 22 per cent, to around $480-500 per tonne, during the same period. Naphthaprices (cfr Japan) also increased, to around $225-230 per tonne in early September. Crude oil prices increased further due to expectations that Opec (Organisation of Petroleum Exporting Countries) and non-Opec countries would continue to maintain production cutbacks (introduced since the first-half of 1999) till March 2000.

Reportedly, the price increases were absorbed due to strong demand for finished products prior to the Christmas season, and the agricultural season for films. Chinese demand improved in August 1999 (in July, Chinese demand was lower due to large purchase in June, and a shift in the regulations governing value-added tax and import tariff rebates).

In addition, traders increased purchases in anticipation of a further improvement in prices. According to sources, demand could also increase due to the build-up of inventories by convertors, by the year-end, in order to avoid any eventualities as a result of the Y2K issue.

South Korean producers were able to increase prices due to strongdomestic demand and exports outside Asia.

Margins of producers purchasing ethylene in the spot market (integrated PE producers, having an ethylene shortfall, and non-integrated producers) would be under pressure.

High density polyethylene (hdPE) prices (cfr Far East Asia) have increased marginally, by around $80 per tonne since August, to around $660-670 per tonne in early September 1999. As a result, the price difference between ethylene and PE has narrowed to around $50 per tonne. (PE producers require a margin of around $180-200 per tonne between ethylene and PE prices in order to cover costs).

As a result, ethylene derivative producers could be forced to shut down plants or lower operating rates (producers may not prefer either of the options, due to the start of the traditional PE demand season in China in September). Honam Petrochemical, which purchases 1,00,000 tpa of ethylene, has shut down its 1,05,000 tpa No. 3 hdPE lines from mid-August to end September, due to low margins.

KoreaPetrochemical Industry, Hanwha Chemical and Formosa Petrochemicals also plans to lower operating rates, unless PE prices increase in line with the increase in ethylene prices.

Availability of feedstocks, naphtha and ethylene, are expected to remain tight, atleast until October. Supply of naphtha is expected to remain tight as refineries in Asia, especially in Singapore and Japan, are expected to continue to operate at low rates. Availability of ethylene is also expected to remain tight until end-October due to cracker shut-downs in Japan.

On the other hand, polymer demand, especially from China, is expected to remain strong until November 1999. Naphtha availability is expected to improve with the start-up of Reliance Petroleum's refinery in Jamnagar in August.