LLDPE futures rebound fails to lift physical market sentiment

09 June 2010 10:00  [Source: ICIS news]

By Chow Bee Lin

SINGAPORE (ICIS news)--The slight rebound in China’s linear low density polyethylene (LLDPE) futures on the Dalian Commodity Exchange (DCE) since Tuesday has failed to lift sentiment in the physical polyethylene (PE) market, industry sources said on Wednesday.

"The rebound was not reflective of the physical LLDPE market, where sentiment is still weighed down by concerns about oversupply and the impact of cheap Middle East supplies,” said Wang Xiaowei, a market analyst at Guangdong-based Jinrui Futures Brokerage Co.

"LLDPE demand in China had not caught up with the domestic capacity expansion in the past two years, and lower-priced supplies from the Middle East were exerting significant pressure on the physical market,” said Wang.

LLDPE futures closed by yuan (CNY) 105/tonne ($15/tonne) or 1.12% higher, at CNY9,470/tonne, on Wednesday morning on the back of stronger crude values. Prices regained part of Monday’s losses, which were triggered by sharp falls in the US and European stock markets on last Friday.

Buying sentiment in the physical market was weak also because the key agricultural film application was currently in the low season, Chinese stockists said.

“Agricultural film demand is expected to pick up in the third quarter [of 2010],” said a stockist.

The futures trade had rebounded mainly because concerns over Europe’s debts had somewhat eased, and higher crude prices in the past two days had strengthened sentiment in a range of commodity futures in China, Wang added.

The rebound in LLDPE futures was normal as it had “over corrected” in Monday’s panic selling, said Jason Huang, a market analyst at brokerage house Shanghai CIFCO Futures Co, referring to the tumble in LLDPE futures prices on Monday.

The over-correction had caused September contract futures to be undervalued, said Kong Liang, an energy and chemical analyst at Zhejiang Yongan Futures Broker Co. 

September futures contract should be CNY9,800–9,900/tonne, based on the average price of CNY9,500/tonne EXWH (ex-warehouse) in the east China physical market and on a holding cost of CNY300–400/tonne, Kong added.

Holding cost refers to the money needed to keep and maintain the raw material, including storage expenses and bank interest.

The physical LLDPE market in Asia was still at risk of another downward correction, as new capacities that had come on stream in China and the Middle East were expected to exert pressure on regional prices, said ICIS pricing’s director of data & analytics in Asia, Larry Tan.

"Naphtha-based PE producers in Asia are still enjoying good margins, especially those who are integrated with steam crackers” said Tan, adding that this was despite the recent plunges in regional prices.

“There’s still room for new production to gain market shares through [the] cutting [of] prices,” Tan said.

For more on LLDPE, visit ICIS chemical intelligence 
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By: Chow Bee Lin
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