Qingdao (China): Shell has recently concluded a deal with Chandra Asri, an Indonesian petroleum and petrochemical major, to acquire the Bukom assets of Jurong Island consisting of a refinery and a petrochemical complex that produces over two million tons of ethylene and propylene and their downstream derivatives. In this context, Propylene Oxide (PO) suppliers are pleased as management and control of PO movement will now be governed by Asians.

PO supply in Asia is largely dominated by imports, especially from the Middle East, Europe, and North America. The PO production in SE Asia and NE Asia, excluding China, remained lower than other regions as chemical margins have remained decisively much lower than Middle Eastern and European crackers. Intellectual property costs and high crude supply to Asian markets kept the overall margins down as competition with others forced domestic SE and NE Asian suppliers to keep their margins low and cut on capital expenditure and investment in the region.

ChemAnalyst’s internal study on the prices and production of PO revealed that Shell’s PO margins in Jurong Island remained comfortably higher, around USD 212-225/MT before the COVID Pandemic took over and Chinese demand remained stronger to absorb the volumes. Since 2021, Shell’s Jurong Island PO integrated production capacity at 490,000 tons/year has been declining owing to lower chemical margins as feedstock costs of Naphtha contracts received from the Middle East remained on the higher end. Moving from 2022-24, the deflationary pressure in feedstock prices remained much slower than demand drop after FY22-23 high stocking environment.

 Beginning from January 2024, chemical margins turned negative for Jurong Island PO as Hydrogenated Naphtha Ex-Hebei prices, according to ChemAnalyst’s database, were assessed at USD 1099/MT for 23rd February 2024 and PO prices, CFR Qingdao deliveries were USD 1060/MT. This situation has further intensified. PO demand continues to remain subdued due to downstream polyether polyols and propylene glycol markets remaining subdued.

Chandra Asri’s acquisition of Shell’s PO production capacities can bring significant advantages to SE and NE Asian markets. This can be realized through better contracts for Naphtha and crude from Malaysian, Indonesian, and Middle Eastern suppliers. Presently, spot prices have eased in May from WTI basis from USD 85/barrel to USD 76/barrel due to a slowdown in demand as inventories and interest have remained high, though Chinese downstream manufacturing activities are recovering, still remained below pre-pandemic levels of consumption. Integrated PO margins in China have remained marginally positive, still better than Jurong Island and European crackers as Chinese gained substantial discounts from Saudi and Middle Eastern suppliers for oil early this year for their FY24-25 deliveries. Some sources revealed that contract discounts extending to USD 15/barrels over Brent index were offered to China, which makes their Naphtha prices substantially sub-thousand US dollar per ton EX basis. But the major challenge for PO and its derivatives has been the demand factor as Polyether polyols and PU hard foam markets are subdued due to construction activities, which resumed a large month in China at a relatively better pace, have high pending orders and high-cost inventories to take care of.