INSIGHT: China polyolefins can head higher but supply pressure looms

10 March 2010 16:23  [Source: ICIS news]

By John Richardson and Malini Hariharan

SINGAPORE (ICIS news)--Talk to a big enough group of traders, producers and buyers and if you keep asking the same questions and passing on the information you have already picked up, a consistent story will start to emerge over the direction of markets.

So it has seemed over the past few days, during which a consensus has emerged that by the end of March, polyethylene (PE) and polypropylene (PP) pricing will stage a recovery.

"Stocks in China are high as traders bought product in January thinking markets would go up after the Chinese New Year,” said a Shanghai-based trader.

“But that did not happen as labour shortages affected production. This situation will not last long. After 10 days end-users will come back to buy.”

We should know soon whether he is right and perhaps whether the labour-shortage problem in southern China is only short term.

Post New Year, everyone is suddenly talking about manufacturing plants being unable to source sufficient workers to run at high rates, thereby dampening polyolefin demand.

“I am not sure whether I’d go along with the ten days’ theory, that does seem a tad precise,” said an Indian trader and plastics processor.

After a brief rally following the Chinese new Year, prices began to slip last week, according to ICIS pricing. For example, linear-low density PE (LLDPE) film grade was reported to have fallen by $30/tonne to $1,260-1,130/tonne CFR (cost and freight) China.

 “I agree, though, that the recent price falls will be short-lived. The underlying demand in China is strong enough to support a recovery with supply also very tight,” added the trader and processor.

The consensus view among those we spoke to was that prices had risen by slightly too much for end-users to stomach – hence, the temporary corrections.

"Prices before the New Year were not the real price. The market is going back to reasonable price levels. It is not bad that markets are quiet now,” added a second Shanghai-based trader.

 Another widespread opinion was that China’s economic growth would only moderate slightly as a result of credit tightening. The Chinese government plans to reduce total loan growth by 22% in 2010 over 2009.

“Tighter lending conditions will take some of the speculation out of the market, but I believe the demand for polyolefins into finished goods will continue to grow very well,” said a source with a global polyolefin producer. China polyolefins weaker

Supply is limited as a result of persistent production problems at new plants in the Middle East and China and continued low operating rates among western producers, was another consensus view.

“We are just not seeing the volumes everyone had expected and so this is having a big positive effect on sentiment,” continued the Indian processor and trader.

“Plants that came on-stream last year have still not stabilised. One major complex, which was supposed to be fully on-stream by late 2008, is now unlikely to reach 100% until Q4 this year.”

The reasons given for all the delays include problems in using technologies on plants of a scale far bigger than what has been built before, a shortage of start-up engineers and allegations of equipment cost-cutting.

It has been suggested that when capital costs were at their peak a few years ago, compromises were made in construction phases.

If the problems with some new complexes are deep-seated then perhaps prolonged shutdowns will be necessary to put the faults right. This could tighten markets even further.

But while the majority view seemed to be that the recent price dips would be short-lived, a few pessimists, or maybe realists, were a lot bleaker.

“More new volumes from the new plants are arriving and this has changed the psychology. I also see a lot more anxiety over the strength of China,” said a Hong Kong-based trader with a major Japanese trading house.

“Buyers are now more willing and able to hold back and wait for further new volumes as demand down to finished goods has slowed down.

“There was some disagreement over whether inventories were high or low before the Chinese New Year. If you include cargoes that had been booked but had yet to arrive, stocks were high. As a result, we’ve seen some liquidation of cargoes by traders recently - showing a change in sentiment.”

Everyone agreed that eventually a supply-side crisis was likely, even if the demand outlook for China is impossible to read.

“These plants are just too big to easily be absorbed by the markets,” said the source with the polyolefin producer, while accepting that the industry had been saying this for at least 18 months.

“It’s really hard to make forecasts at the moment because of the uncertainty over supply and the state of China.

“Last year it was easy to get criticised for being too cautious as, each quarter, conditions kept improving. How do you predict the rest of 2010?”

In the search for easy solutions everyone seems to spend more times these days talking to each other, whether at conferences, through emails or Yahoo Messenger.

“There is a certain comfort in canvassing opinions, in keeping busy. But to be honest, it’s only comfort – it won’t give you the answer,” said a Singapore-located trader, who is obviously benefiting from the increased volatility.

Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog
Click here to find out more on the Asia margin reports
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