INSIGHT: In China petchems some like it hot

22 November 2010 15:57  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS)--Separating the fact from the fiction in China’s petrochemicals and polymer markets feels as if it has never been harder.

Behind this perception in the case of polyethylene (PE) is the influence of the Dalian Commodity Exchange’s futures contract in linear-low density PE (LLDPE) film.

And more broadly, across many other products, it seems as if China is awash with money for speculation in physical cargoes - thanks to last year’s surge in bank lending and all the “hot money” flowing into the country.

Many industry sources now tell us that PE in general (the Dalian has an influence across several different grades) can at certain times behave like any other financial instrument.

In other words, its day-by-day and week-by-week price in China sometimes moves in line with the Dalian as the Dalian follows crude oil and equities.

And so by Friday 19 November, physical pricing for PE had fallen by $70-130/tonne from the previous week - reflecting four consecutive days of declines in the Dalian contract as crude and equities also declined.

And then there is what appears to be a greater ability to gamble on physical cargoes.

"Chinese monoethylene glycol inventories are at 500,000 tonne - close to their maximum level - but prices have still gone up and imports keep arriving,” said a source with a leading producer early last week.

"There are supply reasons why MEG has been so strong this year - ie the great supply surge hasn't happened because of problems with running new plants.

 "But we still do not fully understand why prices have gone up.”

There are good supply and demand reasons why fibre intermediate prices in general have rallied.

These include the soaring cost of cotton on poor harvests which has boosted the demand for polyester.

But purified terephthalate (PTA) now also has a well-established futures market in China and there are the much-older cotton futures markets in various countries.

There have also, though, been paraxylene (PX) and PTA production problems ahead of 1.2m tonne/year of polyester capacity start-ups in China.

Still - with polyester margins under pressure, players down the entire chain need to ask themselves about the sustainability of the price rises.

Returning to PE, dividing the speculation from the real strength of demand seems to have become a bigger headache for producers - perhaps explaining why Dalian is such an important reference point.

Here are two very contrasting opinions about the key China market to illustrate the muddle.

“There have been reports that this is a peak demand season right now. But as far as our analysis over the last ten years shows, business slows down between mid-November and January,” said a senior Asian-based sales and marketing executive with a major global producer last week.

"True, this is an agricultural film season that will provide some support for low-density PE (LDPE) and LLDPE demand.

"I don't hold with the argument that there is already strong demand in China for packaging material ahead of the Chinese New Year. The Chinese New Year isn't that big a deal anyway for PE.

"This is definitely a quiet season overall as everyone is trying to minimise stocks for tax and financial reporting reasons.

"What we think is happening is that there is a lot of trader talk to justify higher prices.”

Traders were moving PE to China to take advantage of the potential for a stronger yuan as the dollar weakened on quantitative easing, he added.

"And so we believe that the demand we are seeing is not driven by fundamentals, but it is instead about speculation and we are worried about inventory levels.”

A source with a South Korean producer, however, also said last week: “In the field we find that stocks with converters are low and demand from critical applications (auto, home appliances, construction) is not bad.

“I believe that the market from December to January will be quite stable.

“The futures market is dragging the physical market (down) a little, but polypropylene (PP) is strong while high-density PE (HDPE) and LLDPE are adjusting. I don't think there will be a dramatic price fall like 2008.”

His outlook for 2010 demand growth is bullish, suggesting that there are very solid consumption-growth reasons behind strong pricing.

Chinese PE demand would reach around 16m tonnes this year compared with 15m tonnes in 2009, he said.

PP demand would total approximately 14.5m tonnes in 2010 as against 13m tonnes last year.

And interestingly, he added that new Chinese plants had suffered from mechanical problems, resulting in a lower polyolefin self-sufficiency ratio than had been expected at the start of the year.

This could have helped keep supply tight, along with big production problems at new Middle East plants that we have already reported.

Are markets really that hard to fathom these days, though, and, as a result, has volatility actually increased?

A source with a second South Korean producer said: “Markets haven’t changed - they have always been as speculative and volatile as they are now.

“It is just that people are getting to understand how they behave a little better as there are so many more of us involved in this business.”

Perhaps it is down to the mathematicians and the statisticians to try and resolve this argument.

Malini Hariharan contributed to this article

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By: John Richardson
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