04 August 2009 15:59 [Source: ICIS news]
By John Richardson
SINGAPORE (ICIS news)--It seems unlikely that when the great writer HG Wells used the ancient quote, “In the country of the blind the one-eyed man is King” as the basis for a short story, he was thinking about China’s Dalian Commodity Exchange’s linear-low density polyethylene (LLDPE) futures contract.
But in a global polyolefins market where there is huge confusion over the extent of real versus speculative demand in ?xml:namespace>
“Even though the producers are not using it for hedging there is a psychological effect as it’s a daily price that’s very easily accessible. Just log on to the screen each morning and there you go.”
A Sinopec official had earlier also told ICIS news that
But the consultant continued: “I agree but in the absence of any real clue about what’s happening in
“The world is a bit lopsided because there are also so many factors confusing the market – for example, the real effect of the decline of availability of recycled polyolefin material versus oil-price increases.
“And there are no reliable inventory assessments at the polymer and finished-goods levels and lack of clarity on local production levels.
But he believes capacity start-ups will reduce
“It will be new supply that will soon drive everything,” he added.
“It’s my prediction that there will be the equivalent of one new world-scale cracker complex on-stream in Asia and the Middle East combined, by the end of the year . This should be sufficient to give clear direction to polyolefins.
“A few new crackers might have started up but they won’t all be running at full rates.”
If the exchange has become an important reference, is it driving prices in the physical market?
This graph from our colleagues at CBI Research & Consulting shows a pretty close correlation between exchange and real-market LLDPE prices up until May.
Although he agreed that producers hedging on
“Think about the psychology,” a Singapore-based trader added.
“I can make good money on
“When the physical market goes quiet I go in and play (on the exchange) with my friends. It’s a great new way of making money.
“This is the strange situation: You have trading companies dispatching staff to sell real cargoes while the bosses sit in their offices watching the
The exchange might only retain its apparent influence in the long term if producers start using it to hedge – which could depend on less volatility and risk.
A drop in bank lending going into speculation on equity and property markets and commodities exchanges we could also hit the volume of LLDPE traded.
Signs this might be about to happen emerged late last month when Wu Xiaoling, who recently retired as deputy governor of the central bank, was quoted as saying that new lending might reach Rmb12,000bn this year.
This credit expansion would be equivalent to
Excessive lending could lead to bubbles in the property and stock markets, she reportedly added.
The increase in volume on
So far in August there has been a year-on-year volume decline of 80.26%.
Nearly all of the trading is entirely paper – meaning both parties agree to financially settle; there is hardly any physical delivery.
This is hardly surprising when
Markets seem exceptionally opaque at the moment, giving
Producers and buyers are always seeking more clarity.
But if clearer direction only arrives through a sudden collapse in energy prices and/or a surge in new petrochemical capacity, this would hardly be good news.
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