INSIGHT: Searching for clarity in Asian polyolefin markets

17 March 2009 11:44  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--Asian polyolefin markets are probably best described as rudderless at the moment due to dramatic week-by-week shifts in sentiment.

For the week ending 6 March, for example, the big concern was an imminent supply glut, particularly in polypropylene (PP), due to plant start-ups in the Middle East and Asia.

The pain for polyethylene (PE) might have been seen as a little more stretched out due to less bunching of new plants. However, one senior industry source predicted: “If all the new PE plants start operating on schedule, I can see oversupply globally being as much as 20-25%.”

Over the last few days there has been a slight resurgence in confidence on the belief that many of the new plants in the Middle East will continue to be delayed.

Some of the mammoth amounts of new capacity, such as Yansab National Petrochemical Co’s (Yansab) Yanbu facility in Saudi Arabia, could be pushed into next year, providing everyone with a welcome respite.

If US Federal Reserve Chairman Ben Bernanke is right about the global economy starting to recover in 2010, it will mean that the delayed volumes will hit the markets at a better time.

So, is this rose-tinted nonsense or is it real and tangible evidence that, at the very least, chemicals pricing has reached the bottom? 

Or, are we talking about a lack of visibility down every supply chain due to even more uncertainty than usual over inventory levels and lots of confusion about start-up dates?

There appears to be no consensus about chemical demand growth in 2009 and when a broader economic recovery will begin.

In such an environment, sharp swings in sentiment – and sometimes pricing – could happen very frequently, much to the satisfaction of the traders.

“People keep telling me that they can’t read the market, that it’s not behaving rationally. But the market is the market and it’s going to be like this for some time,” said a shipping broker.

He was not prepared to call the bottom of any chemicals market, as he said he feared that more dire economic news will emerge.

Adding to the trepidation is the structure of China’s polyolefin market.

“If you’re a small resin buyer, you can’t go directly to a Sinopec or a PetroChina and ask to buy a few tonnes – they just won’t talk to you,” says a senior executive with a western polyolefin producer.

“Instead, you have to go through a distributor who might be at the end of a long line of distributors.”

Greatly increased bank lending has raised the concern that these numerous distributors have bought large amount of stocks and plan, as they sometimes do, to start acting as traders.

It hasn’t been unheard for end-users to also resell their stocks if they see a quicker gain from trading rather than manufacturing, say, plastics packaging.

The great news is that more plentiful credit has made life a lot easier down every supply chain in China. Ultimately, the greater quantities of money in the system might result in a sharp increase in consumer spending.

“But I don’t think the structure or the mentality of the downstream industry is really helping in China. Structurally, you also have lots of small buyers as well as multiple levels of distribution, making real demand, even in the best of times, hard to read,” said the executive with a western polyolefin producer.

“The Chinese largely escaped the impact of the Asian financial crisis in 1997-1998 and so remain much more prepared to take risks than our customers in Southeast Asia.”

He described the southeast Asian market as “much more orderly”, which is also due to fewer converters who tend to be bigger in scale.

Only in bi-axially oriented PP (BOPP) film grade has China matured to the point where the conversion industry is concentrated in the hands of a small number of companies with big capacities.

Another problem resulting from the lack of visibility down every supply chain is that sharp fluctuations in pricing might more frequently fail to reflect broader markets.

A resin producer was rumoured to have cut its price by $400/tonne to around $500/tonne CFR (cost and freight) Asia earlier this year in an effort to relieve temporary inventory pressure and help out a few distressed customers.

“Confectionary manufacturers and other buyers of plastics packaging heard the news and effectively pressed for discounts from their suppliers – the converters – because they are big companies, often with lots of supply options,” the executive said.

When the converters sought to buy at $500/tonne, the price had risen back to $900/tonne, he said.

The danger is that this kind of volatility could drive good, small and medium-sized companies out of business as credit remains very tight everywhere except in China.

Polyolefin producers have also identified another threat in trying to read demand, which is a result of the tight credit conditions: end-users of resins and chemicals have centralised purchasing decisions to regional, or even global, headquarters in order to better marshal credit.

The theory is that the senior players with the most experience – and with the greatest clarity on the amount of financing available at any one time – are best equipped to avoid breaching very strict borrowing limits.

“In practice, though, I can’t see this as being beneficial, as those who really know the market are the operations guys on the ground in countries such as China and India, where markets are so difficult to read,” said a second source with another western polyolefin producer.

“To be frank, it’s going to be a lot easier to spin a story to someone sat hundreds of miles away in a head office that the Indian market is booming when, in fact, those on the ground know differently.”

There could even be a morale issue here for those with the experience on the ground whose views no longer count as much, presuming that they’ve been able to keep their jobs.

So, amidst all the gloom and uncertainty, what is the solution?

“Work hard, get back to the basics, keep your head down, and work on building and maintaining good and long-term relationships with your customers. That’s what I keep telling my team,” said the shipping broker.

This sounds like good advice. Now, what everyone needs are the details of how to achieve such objectives.

See John Richardson’s Asian Chemical Connections Blog
For more on polyolefins visit ICIS chemical intelligence
Read Paul Hodges’ Chemicals and the Economy blog
To discuss issues facing the chemical industry visit ICIS connect

By: John Richardson
+65 6780 4359

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