INSIGHT: Traders soak up more China PE/PP

18 July 2011 15:08  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--Reading the Chinese petrochemicals market has always been about as easy as trying to nail water to the wall.

Take polyethylene (PE) and polypropylene (PP) as examples where prices have now been rising for two weeks in a row, according to ICIS pricing assessments.

China polyethylene pricesPE prices jumped by a further $20–50/tonne (€14–36/tonne) – on a cost and freight (CFR) basis and depending on the grade – in southeast and northeast Asia for the week ending 15 July. This followed increases of $10–80/tonne the previous week.

PP was up by $10–70/tonne for the week ending 15 July and $10–50/tonne the previous week.

Markets had previously been flat or in decline following the end of the Chinese New Year in late February.

Sales have also picked up, but who has bought these extra volumes?

“In my view it is almost entirely us, the traders,” said a Singapore-based trader.

“End-users continue to mainly sit on their hands because of all the uncertainties out there arising from crude oil price direction, the likelihood of further monetary tightening in China, the weak US economy and the European debt crisis.”

Some traders have recently bought PE mainly to get hold of trade finance in order to complete real estate projects in China, a UK-based industry observer has been told by US hedge fund contacts.

“Increases in bank reserve requirements have made it very difficult to get money to complete these projects via the normal route,” he said.

If they achieve their first objective of finishing these projects, the traders might not be too worried about getting good returns on PE cargoes.

The polyolefins market was going sideways last week, added the Singapore-based trader.

“Everyone is waiting for the third week in July when offers for August material from the Middle East are likely to emerge,” he said.

One of the justifications for the recent price rises is tighter supply as a result of Asian cracker turnarounds during August.

But Saudi Arabia is pumping more oil, and has been doing so for at least two months, in response to concerns about the impact of high crude prices on the global economy.

More oil production means more associated gas – the feedstock for Saudi Arabia’s steam crackers.

Various estimates were published last week of Saudi crude output in June that ranged from 9.4m bbl/day to 9.8m bbl/day, up from around 9m bbl/day in May.

Production was approximately 8.5m bbl/day through much of 2009 and all of 2010, reducing the country’s ethylene output by around 1m tonnes on an annualised basis, according to a Middle East-based chemicals analyst. That is the equivalent of a world-scale cracker taken out of the market.

The country’s crude output has continued to climb in July, possibly reaching 10m bbl/day, according to the International Energy Agency. This would, in theory, enable Saudi Arabia’s crackers to once again run at 100 per cent.

However, this is the peak electricity demand season as air conditioning units are run full-tilt to deal with the scorching Saudi summer. How much of the extra gas is being sent to power generators as opposed to the petrochemicals producers?

A further complication is the mix of extra petrochemicals exports. What is the split between additional shipments of ethylene, monoethylene glycol (MEG) and PE?

"Saudi Arabia has definitely, in my view, already raised PE production on more availability of associated gas. I am seeing more volumes in our local market,” said a source at an Asia-Pacific plastics processor.

Putting the debate over extra Saudi production aside, how credible is the argument of tighter supply resulting from Asian cracker turnarounds?

“It needs to be placed in the context of the whole year,” said a US-based chemicals analyst.

“Production losses in Asia, based on scheduled maintenance work, are actually forecast to have peaked in February-March 2011. Supply in the fourth quarter looks pretty well balanced.”

The demand argument behind price hikes over the past two week is centred on the start in August of the peak manufacturing season for exporting finished goods to the West in time for Christmas. August also marks the beginning of the next agricultural film season.

But tight lending conditions have badly hurt China’s small and medium-sized enterprises (SMEs), which make up the bulk of polyolefin buying. Key consumer goods sectors such as autos are also struggling.

The June inflation rate of 6.4% was the highest in nearly three years. Core inflation, when you take out the highly volatile effect of food prices, rose to 3% in June – the highest for at least five years.

Many economists are still predicting that inflation will decline in the second half of the year, but they had wrongly forecast it would peak in the second half of 2010.

Concerns are mounting over the impact of all the money still sloshing around the economy as a result of the huge 2009–2010 economic stimulus.

Stock markets took temporary heart last week from the release of second-quarter GDP figures that showed the economy expanded by 9.5%.

But the government has set a target for 2011 GDP growth of only 8%.

This all points to additional monetary tightening, possibly including further increases in bank reserve requirements that would exert more pressure on the SMEs.

Or the government might decide to strengthen the yuan. This would also hurt the SMEs, which often operate on razor-thin margins.

Making sense of short-term market direction is, indeed, as difficult and as pointless as trying to nail water to the wall.

What is perhaps clear, though, is that there has been no major improvement in sentiment among polyolefin end-users, which has to happen for a sustainable improvement in the market.

“I think buying is going to stay hand-to-mouth until the end of the year,” added the source working for the Asia-Pacific plastics processor.

Consensus demand growth estimates for PE, PP and polyvinyl chloride (PVC) in China during 2011 were 11–13%, said an HSBC report released in late June. These forecasts look unlikely to be realised.

But demand for PE alone has grown by a staggering 53% since 2008, according to Paul Hodges, a UK-based consultant with International eChem.

This is, therefore, hardly a devastating downturn in a market that is bigger than probably anyone predicted back in 2007.

So far…

($1 = €0.71)

For more on PE, PP, ethylene, MEG and PVC visit ICIS chemical intelligence
Bookmark Paul Hodges’ ICIS Chemicals and the Economy blog
Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: John Richardson
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