INSIGHT: Tight supply, improved sentiment lift polyolefins for now

11 January 2013 11:44  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--Thank goodness for small mercies. The last month-and-half has been very good in China for at least one polyolefins trader and one producer after what, on the whole, was a very disappointing 2012.

"I thought there would be a mini-rebound in pricing in early November, and I was correct," said a Singapore-based trader.

"Prices then retreated slightly before a stronger rally began in late November."

China PE prices rallied from late November

A source with one global polyolefins producer has also reported that, volume-wise, his company enjoyed a very good fourth quarter.

But a source with a second producer, based in North America, still believes that only Chinese converters with an urgent need to fulfil orders before the Lunar New Year, which this year falls on 10 February, have increased their resin purchases.

“Most fabricators are maintaining hand-to-mouth purchasing because of the uncertain outlook,” he said.

The recovery since early December appears to have been driven by:

  • Shutdowns in the Gulf Co-operation Council (GCC) region. The estimated production loss as a result of confirmed plant turnarounds is 118,000 tonnes of linear-low density polyethylene (LLDPE), 353,000 tonnes of high-density PE (HDPE) and 238,000 tonnes of polypropylene (PP), according to ICIS.
  • Outages at the PetroRabigh and Daqing petrochemical complexes in Saudi Arabia and China, respectively. The Daqing outage is expected to last until around February and includes the company's 300,000 tonnes/year HDPE/LLDPE (high density polyethylene, linear low density polyethylene) swing plant and its 250,000 tonnes/year HDPE facility. The PetroRabigh complex is expected to restart in late January. Offline at the moment are the producer's 600,000 tonnes/year LLDPE plant, its 300,000 tonnes/year HDPE unit and its 700,000 tonnes/year PP facility.
  • Reports that northeast and southeast Asian cracker operators have cut capacity utilisation from more than 90% in November to around 85% in December/January. But there are rumours that some South Koreans are continuing to run hard.
  • Confidence amongst converters that China's new leaders mean business on economic reform.
  • Much better economic data emerging from China. For example, the final HSBC/Markit Economics Purchasing Managers’ Index for December, which was released in early January, was the highest for 19 months. Polyolefins markets may rally even further on the 14.1% year-on-year December surge in China’s exports, announced on Thursday of this week (10 February), which was way better than the expected 5% increase. Imports also rose by 6%, which was again well above forecasts of a 3.5% rise.
  • The fiscal-cliff escape in the US. This has caused a rally in stock markets and in oil and commodity prices in general. Brent crude-prices increased by $3/bbl last week. Iron ore prices were earlier this week up by around 70% compared with four months earlier. “The rally first began on greater confidence in the Chinese economy, with further momentum added by the fiscal-cliff deal,” said a Perth, Australia-based resources investment analyst."Is there a real improvement in polyolefins demand or is this the result of short-term tight supply and an improvement in sentiment?" queried the Singapore trader.


"Quite frankly, I don't really care as I've made good money since November and can now afford to play very cautiously over the next couple of months, without worrying about missing out on anything further."

Reasons to be cautious about the sustainability of the recovery include:

  • The end of turnarounds in the GCC in February-April and the resumption of production at PetroRabigh and Daqing.
  • Substantial amounts of new capacity. ExxonMobil might ramp-up production at its two 650,000 tonnes/year metallocene LLDPE plants and its 450,000 tonnes/year polypropylene (PP) facility in Singapore, now that its 1m tonnes/year cracker is being commissioned. China is also set to bring on-stream significant amounts of polyolefins capacity this year, including Sinopec Wuhan Petrochemical Co at Wuhan in Hubei. The complex’s 300,000 tonnes/year LLDPE plant and its 400,000 tonne/year PP plant are due on-stream in the first half.
  • The fact that stock and commodity markets also rallied in 2009, 2010, 2011 and 2012, only for the rallies to peter out .


“I think the key to the length of the stock market and commodities rally is how long it will take before enough of the right kind of people worrying about the need for the US to raise the debt ceiling,” added the Perth-based analyst.

“The avoidance of the fiscal cliff was a fiscal fudge. It solved absolutely nothing, but markets will seize on any slight good news as an excuse for a rally.”

The US Treasury Department would, by late February or early March, run out of options to cover US debt and could begin to default on government loans, unless Congress reaches a deal on the debt ceiling, wrote the Associated Press in a 9 January article

Economists had warned a default might trigger a global recession, it added.

“The deal on the fiscal cliff has left Democrats and Republicans further apart, with deep divisions within the Republican Party,” said the investment analyst.

Events on the ground in China might seem a long way from the US debt crisis.

But polyolefin producers point out that a key issue for Chinese growth this year will once again be the strength of its finished-goods exports to the west (many of these finished goods are from made locally-made and imported resin).

“I have written off Europe – I cannot see any hope for the eurozone this year. All I can realistically hope for in the west is that the US does get past the debt ceiling,” added the source with the second polyolefins producer.

The other key uncertainty is Chinese government policy.

Following the leadership handover last November, polyolefins producers and traders expect a “steady as she goes” approach by the new politburo, involving modest economic stimulus and, on the surface at least, economic reforms.

If the external environment weakened substantially, however, (for example because of a US debt default or a new crisis in Europe), Beijing might be forced into a big new stimulus programme, said the producers and traders.

This could add to concerns about inefficient investments and bad debts, while delaying the reform agenda.

Returning to the more immediate outlook for polyolefins, the source with the second producer said: "From late February/early March, when the Chinese New Year is over, plants have returned from turnarounds, new capacities start to come on-stream and the debt ceiling issue has come to a head, we should get a real idea about the strength of demand."

“Markets will quieten down in China from 15 January, ahead of the New Year, and so we are going to have an extended period of uncertainty.”

On a positive note, uncertainty is one thing that polyolefin producers and traders have become much more accustomed to dealing with since 2008.

Additional reporting by Ong Sheau Ling, Helen Lee, Becky Zhang and Nurluqman Suratman

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog


By: John Richardson
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