15 April 2011 13:11 [Source: ICIS news]
By John Richardson
KUWAIT (ICIS)--Affordability, reduced credit and higher interest rates in ?xml:namespace>
A correction has already begun in the monoethylene glycol (MEG) chain, with prices down by 14% since a 37-month high in February of $1,275/tonne (€880/tonne) CFR (cost and freight) China, according to the latest weekly ICIS pricing assessment.
The synthetic-textiles chain has also faced two weeks of price falls in paraxylene (PX) and purified terephthalic acid (PTA).
After the Lunar New Year holiday in
Integrated margins for low density polyethylene (LDPE) in northeast
Not surprisingly, therefore, northeast Asian PE producers, which include some of the higher-cost players, are talking about cutting back operating rates.
So what’s going on?
Tight supply in PX, a surge in new polyester capacity and the high price of cotton seemed to have given the fibre intermediate players the upper hand.
Textile and garment producers are now pushing back, however, citing squeezed margins.
MEG was, of course, also a beneficiary of these factors until it, too, succumbed to pressure from the downstream players, according to a source with a leading producer.
The source said: “What is worrying me right now is that there is 600,000 tonnes of MEG in storage in tanks in
PE was also hit by overstocking before the Lunar New Year in anticipation of a post-holiday rally that didn’t happen, said a Singapore-based polyolefins trader.
“The weak market in
The trader said he was concerned late last week that arbitrage opportunities for re-exporting resin from
For several weeks now the traders have been successfully re-exporting PE to try and bring the
A more important factor for PE, and petrochemicals in general, could well be the outlook for
Interest rates in
Reserve requirements of the country’s banks have been increased on numerous occasions since last year, reducing the amount of money that state-owned banks can lend.
But this is where it gets confusing, as, despite apparently tighter liquidity, a “shadow banking” system has reportedly developed in
So why are we seeing continuous reports that the converters and fabricators (those who convert PE pellets into finished goods or components of finished goods) can no longer access credit?
One theory is that as many of the converters are small and medium-sized companies, they cannot afford to use the shadow banking system, which has much higher interest rates.
The other argument is that PE prices are simply too high and the market outlook too uncertain to take the risk of expensive credit, whether you are a big company, a small company or a speculator.
“To me, it feels like 2008 all over again. I wish I had realised this before overbuying in January,” the trader said.
“Prices, in retrospect, have gone up by too much too quickly. We were all gambling on the rally continuing after the [Lunar] New Year, but this hasn’t happened because inflation is now the big issue in
The mention of 2008 should ring alarm bells across the industry, as it suggests that global inflation driven by high oil prices – plus overheating in China resulting from economic stimulus packages – has created the threat of big declines in commodity prices in general.
According to Paul Hodges, of the UK-based consultancy International e-Chem, every time oil prices (in real terms) since the 1970s have gone above $50/bbl for a sustained period, chemicals demand has fallen. (Paul Hodges writes the Chemicals and the Economy blog for ICIS.)
This is obviously a danger right now.
“Overall, I remain bearish. I made my money early in [the first quarter] and plan to be cashed-up in the second quarter and quite possibly into the second half,” added the trader.
Sound advice, maybe?
($1 = €0.69)
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