INSIGHT: Bad visibility clouds China's polyolefins market

09 April 2010 15:37  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--Hope springs eternal when it comes to trying to fathom the direction of the polyolefin market in China.

One particular hope rests on March import numbers from China Customs, due to be released later this month.

The data might just give a pointer to the extent that new local capacity has displaced the need for imports – and whether all the talk about credit-tightening has translated into weaker demand.

“March will be the first ‘normal’ month in 2010, when comparisons might just be valid with import volumes last year. Late January and the whole of February were distorted by the build-up to the Chinese New Year,” said a southeast Asia-based petrochemicals consultant.

New local capacity includes Tianjin Petrochemicals. Volumes from the recently-started complex are being seen in much greater quantities in the market, according to several traders and producers.

This is being absorbed as output from the Fujian Refining & Chemicals complex, which came on stream at the end of August last year, is close to 100% of capacity, according to a source familiar with its operations.

But what will make the March numbers hard to read, as so often happens with China import statistics, is a huge inventory overhang in polyethylene (PE) – the result of heavy buying by traders of overseas material late last year.

“I remember that you had asked me where all these heavy imports were going,” said a source with a major North American PE producer.

“Now I can tell you – into warehouses! At the end of March, bonded warehouses had 2-3 times their level of normal stocks and we have no idea how bad the situation is inland, at all the warehouses where yuan-priced domestic material is stored.”

Credit remained extremely easy to obtain late last year with less concern over the Chinese government’s efforts to cool the economy down, said a Singapore-based polyolefins trader.

“Many of the traders made the dangerous assumption that the future would be the same as the past.

“Recently, the government has been talking about cutting loan growth by 22% compared with 2009.”

Such has been the inventory overhang in PE that small quantities of resin imported into China has been re-exported to Brazil, Bangladesh and Israel, the trader added.

What is strange, though, is that when you look at the graph below showing import volumes for the whole 2009, you will see that PP shipments also surged late last year – and yet the PP market is in radically different shape to that of PE.

China polyolefins graph2
Source of Data: International Trader Publications

“Our assessments of rolling inventory indicate that PP stocks in China have not been as high as those for PE,” the southeast Asian-based petrochemicals consultant added.

“Reduced availability from the US in January-February has certainly been a factor behind this and this and has been reflected in pricing. Whereas PP pricing has remained pretty solid over the past few weeks, PE has slipped by $50-60/tonne.”

The drop in supply from the US is due to the 53% rise in propylene costs since November 2009, with April contracts prices settling at 7 cents/lb ($154/tonne) earlier this week.

In short, therefore, if the March import figures show a sharp drop in both PE and PP this might tell us little about the underlying, long-term state of the market (PE numbers could be down on this huge inventory overhang with PP also lower, partly on lack of availability).

And if the statistics surprise on the upside, be careful of anybody who argues that this is a firm indication that China’s underlying demand is booming.

“OK, credit has got a little tighter locally, but there are still an awful lot of speculators out there,” continued the Singapore-located trader.

“I have done a lot of business with other traders in China who only want to buy resin in order to get hold of the 90 days’ credit for speculation in other commodities.

“A lot of foreigners don’t understand what continues to underpin demand in China.

“These traders will buy resin in US dollars and then sell in Yuan at a loss to local end-users. They will then use the credit to try and make money in steel, coal and other hot commodities before the 90 days are up.”

This complex intra-trade business is now been further bolstered by rising expectations of a yuan revolution, he added.

“The hope is that if you borrow in US dollars and convert to yuan the local currency will have strengthened by the time your 90 days are up.”

This suggests that a bursting of the bubbles in steel, coal and other commodity prices would have a big knock-on to demand for polyolefins, as would a yuan revaluation.

And it also suggests that any month’s polyolefin import statistics need to be taken with a large pinch of salt.

So what’s the sentiment like among buyers then, perhaps a more useful pointer to the underlying state of the market?

“Overall, it’s one of cautious optimism over the economy. But they know there’s a lot more new capacity just around the corner,” said a Hong Kong-based polyolefins trader.

New ethylene capacity, including a lot of downstream PE, will total 9.5m tonne/year in 2010 with global demand growth in normal market conditions around 5m tonne/year, according to ICIS data.

“Increased supply from the Middle East has been particularly big in linear low density PE (LLDPE) so far this year,” continued the Singapore trader.

“A major producer from the region plans to deliver 40,100 tonnes into warehouses in Singapore in April for sale to China and Southeast Asia.

“This same producer only sold a total of 200,000 tonnes to China in the whole of 2009.”

He added that high density PE (HDPE) would also get ugly.

New PP capacities in 2010 include the 800,000 tonne/year Borouge plant in Abu Dhabi and the 400,000 tonne/year Siam Cement facility in Thailand.

The Borouge plant will start up in the third quarter and Siam Cement in the fourth quarter, according to ICIS plants and projects.

The volume of new capacities seems to be far too big to prevent a severe margin-squeeze at some stage, with most estimates indicating that this will happen in the fourth quarter this year.

But making an educated guess about what this margin-squeeze will mean for the China market remains about as easy as nailing water to the wall.

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Read John Richardson and Malini Hariharan's Asian Chemical Connections blog

By: John Richardson
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