An inside view

25 July 2005 00:01  [Source: ACN]

Can a new report on China’s polymers market give a full picture of pricing and demand? Mark Lazell finds out

How would you like to get a close look into the mindset of resin processors and distributors in China?

Not possible, you say? Oh yes it is, says US-based plastics market and business intelligence specialist Townsend Polymer Services and Information, which has launched what it claims is a unique approach to surveying the plastics market in China.

This is no pantomime, however. The Plastic Market Monthly (PMM) China programme is, claims Townsend, the most comprehensive report ever published on resin pricing, inventory, demand and operating statistics of China’s distributors and processors. Targeting 26 grades of plastic resin covering high-density polyethylene (hdPE), low-density polyethylene (ldPE), linear low-density polyethylene (lldPE), polyethylene terephthalate (PET), polypropylene (PP), and polyvinyl chloride (PVC) films, the report also identifies aggregate demand expectations for four months forward, and business cycle trends to anticipate market swings.

It’s been quite a labour of love. Every month, data is gathered from what Townsend says is a ‘consistent’ set of around 10 000 resin processors and distributors in ten coastal provinces in China (where 70-80% of resin consumption is concentrated). Participants are interviewed for the major grades they purchase, with data collected including price paid; demand projections; resin converted; inventory; operating rates; production days; logistics; resin packaging type; and market commentary. Key data are then segmented by grade. The approach, says Townsend, makes the report the ‘only source of what customers actually pay for resins in China, as well as providing near-term demand expectations.’

Anyone who has any experience of working on the ground in China’s plastics community will know how difficult it can be to get information – particularly accurate information – which could be critical to businesses and markets. In a diverse country with many thousands of resin producers, vested interests and language barriers, the task is rather daunting.

That’s why Townsend needed a reliable structure in the country to dig away at the coalface of Chinese resin processors and distributors. All China Market Research (ACMR) came up trumps, according to Townsend. A subsidiary of the National Bureau of Statistics of China, ACMR is exclusively authorised by the State Statistical Bureau to use statistical data for commercial purposes. With such credentials, it was perhaps little surprise to learn that it has the largest, most up-to-date database of Chinese resin processors and distributors.

Getting in touch with Reality

ACMR pounded a lot of pavement as the ears and eyes of Townsend, to turn PMM China into reality. The process took almost ten years, in fact, during which its network of consultants and experts fanned out across the country to search for information.

They weren’t short of potential sources – there are, say Townsend, an estimated 120 000 product-to-film processors alone in China, and 9000 distributors. Collecting information would be a key challenge, so it was decided to take a focused approach on the film market.

‘The key to our methodology is targeting specific grades,’ explains Frances Moore-Jones, Director, Market Reports at Townsend Polymer.

Townsend’s grade-specific benchmarks detail resin purchase prices by grade and sales channel. Purchase prices are, it says, tracked by source – China’s resin producers, importers and distributors – illuminating sales-channel differentials. The company adds that operations data include critical inventory levels at separate stages of the market, four-month demand forecast expectations, resin logistics trends, and operating cycles.

‘Projected change in demand of converters and distributors can be a key indicator of the perceived short-term market conditions and the effect of resin pricing or other market influences,’ the company says.

In China, most resin is sold through distributors at so-called ‘trading malls’ in the east and southeast of the country, such as the Yuyao Plastics Chemicals Trading Mall, also known as China Plastics City, in Zhejiang, which houses the offices of more than 500 distributors.

‘Buyers and distributors negotiate sales and logistics daily,’ says Moore-Jones. ‘Some of these malls trade as much as 1m tonne/year of plastic.

‘What we are trying to do here is eliminate doubt in the market – we are trying to let people know what happens when the resin leaves the suppliers’ hands,’ she explains.

But why film? According to Moore-Jones, it is a reflection of the growing significance of the Chinese film market.

‘Film applications account for 61% of China’s total PE consumption and 17% of PP consumption. This year, 6.2m tonne of PE and 1.4m tonne of PP will be converted to film. By 2009, this will rise to 7.9m tonne of PE and 2m tonne of PP being converted to film,’ she explains.

‘In contrast, western Europe will convert 7.5m tonne of PE and 1.7m tonne of PP to film by 2009. China will have surpassed western Europe by 2009. PE consumption is also estimated to grow at 6% per year in China up until 2009, during which time Townsend estimates that it will need an additional 3.24m tonne of PE – the equivalent of 10-11 new plants,’ she adds.

The Holy Grail

According to Townsend, PMM China provides inventory levels at converting sites and distributor warehouses – taking readers inside China’s demand-side operations. Inventory levels, combined with projected change in demand and operational statistics, offer what the company says is an ‘intimate’ look into the mindset of resin processors and distributors in the country.

But this may sound too good to be true.

‘There is always an element of doubt – people have biases, depending on which way they want to see the market move,’ explains a source at a leading Japanese chemical company in Shanghai.

‘In China, information is shared quickly among traders, whether it’s by email or SMS – so the trend is that when one person wants to buy a product, everybody does,’ he says.

Moore-Jones says that building an accurate report depended on developing bonds of trust with information suppliers. ‘So, when we interview our sources, we will not be revealing any specifics about their plant. Their information is simply aggregated.’

Inventory trends

Townsend claims that not only will its clients be able to see how prices vary by source of supply, but they will also be able to understand inventory trends that are held at each level downstream.

‘Inventory levels at converter plants in China are lower than the US/Canada norm,’ says Moore-Jones, citing research from PMM China March.

This research revealed that China’s lldPE converters held an average of seven days of resin inventory, while the 12-month average for the US/Canada market is 11.

‘We estimate that China’s lldPE converters have held between one and ten days of resin inventory over the last 12 months,’ she explains.

‘It’s much more of a hand-to-mouth business in China. Credit terms are practically non-existent, converters have little or no working capital and resin contracts (as we know them) are scarce – therefore converters are more likely to buy in small quantities, more frequently.

‘Distributors on the other hand are better funded, and are therefore more likely to hold considerable inventory levels. Through our early PMM research, we see that distributors tended towards inventories of 29 days or more on average in Q1 2005.’

So, could PMM China really represent the breakthrough which everybody has hoped for? Not everyone believes so.

‘I think we’ll have to treat the report with healthy scepticism,’ says the Shanghai source. ‘In my opinion, I’d still have doubts as to the credibility and accuracy of the information, knowing how information is used in China.’

‘If it really is based on accurate information, then it is a breakthrough as it is notoriously difficult to get credible numbers on polymer inventory,’ he adds.

Moore-Jones is, however, understandably upbeat on the impact of and reaction to PMM China to date.

‘Every major resin producer in the world has expressed an interest in the report – including large trading firms and large processors in Europe and the US,’ she explains.

In China, the initial response was more guarded.

‘Two years ago I’d say it was neutral. But people in China are definitely now interested in what ACMR is trying to do,’ Moore-Jones adds.

PMM China is the culmination of a two-year project. Before its recent launch, a pilot programme was run to test the report under scrutiny, and, in Moore-Jones’ words, ‘to make sure we were talking to the right people’.

Interesting information

The pilot project unearthed some interesting information. For example, it was found that PP film-grade resin prices in March ranged between US$1087/tonne and US$1751/ tonne, a 30 cent/lb price spread.

Meanwhile, according to the findings of the study, prices of imported resin were almost always the lowest available, while distributors and producers often competed for market share with parallel rates.

LdPE liner-grade resin showed to be selling between US$1278/tonne and US$1643/tonne among producers and importers; while distributors were able to offer prices as low as US$1149/tonne – implying that they must be drawing from lower-priced inventory.

‘Comparing resin available to the China market with that of the US, China has a clear price advantage for the following resins: PVC flexible film, A-PET, hdPE high molecular weight and medium molecular weight film, ldPE clarity homopolymer film, and lldPE high-strength liner,’ reveals Moore-Jones.

As a monthly product, is there a danger of the product being dated?

‘It depends,’ says the source in Shanghai. ‘Most people in China look at the short term – I think we lack a longer term view of the markets at the moment to give us a deeper understanding of longer term trends, which this service could provide.

‘On the other hand, patterns change in China every week, so you could question the value of a monthly report,’ he adds.

But Townsend’s China report could mark something of a watershed in the way market information is gathered in the often murky world of Chinese resins.-

China PE consumption (m tonne)

	2004	2005	2006	2007	2008	2009	AAGR*
HdPE	4.04	4.307	4.577	4.966	5.19	5.548	6.5
LldPE	2.88	3.047	3.211	3.397	3.588	3.8	5.7
LdPE	2.628	2.777	2.925	3.085	3.283	3.451	5.6
Total	9.548	10.131	10.713	11.448	12.041	12.799	6.6
* Average annual growth rate
Source: Townsend Polyethylene Report

Chinese converters’ resin purchase price (US$/tonne), 2005

Resin	From Distributors Jan	Feb	March	Range March	From Producers Jan	Feb	March	Range March	From importers Jan	Feb	March	Range March
LldPE butene liner	1278	1337	1394	1147-1540	1267	1325	1335	1309-1449	1172	1226	1278	1139-1570
LldPE hexene liner	1303	1363	1421	1329-1479	1299	1358	1416	1413-1449	-	-	-	-
LldPE octene liner	1312	1372	1431	1389-1570	1300	1360	1418	1331-1449	-	-	-	-
LldPE metallocene liner	1319	1379	1438	1274-1691	1299	1358	1416	1208-1498	1270	1328	1385	1008-1449
LldPE high strength liner	1320	1380	1439	1139-1691	1277	1335	1392	1249-1498	1028	1075	1121	1149-1498
Source: Townsend Polymer

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