Picture: The China Daily
"I've given up trying to read the polyolefin market in China. I just can't figure out what's going on," said a senior source with a major North American producer late last week.
"I keep returning to the fundamentals and cannot understand why prices have risen so steeply since mid-February."
Him and me both; we are perplexed by statistics which show a rise in domestic polyethylene (PE) production and imports, despite, as my colleague Paul Hodges points out, a sharp in exports of finished goods.
Where is all this stuff going? Into inventories of finished goods, perhaps, as factories are kept running for social reasons?
Oil is another reason why chemicals pricing in general has gone up by so much.
Now it looks as if equity and oil markets are heading in the other direction.
But as a second source told me by email this morning: "I've stopped worrying about this; I am just making money while it lasts."
Quite, but to return to the North American producer and his theories for these weird numbers, he added the following:
(Anybody else out there - your views as always are more than welcome).
"Dalian (the LLDPE commodity exchange) is now leading the market - i.e. people are pricing off it.
"My big concern is that large volumes are being stored in Dalian warehouses for physical delivery and could hit the market in one flood. I am still confused about how much actually turns physical - very little so far from what I've read, which is strange as the website states that each contract has to close with physical delivery.
"The Dalian exchange might be a reason why we have seen both stronger import volumes and higher local production.
"Some strange things are happening which might be down to the futures market. For example, agricultural film demand remains strong even though this is not the agricultural season.
"This could be the result of Dalian and/or speculation and high storage levels in the physical market made easier by the very easy credit conditions in China.
"There also seems to be a correlation between higher pricing and the fall in recycled or scrap imports.
"The reduction is about 30% so far this year, which is due to less scrap-material availability in the West.
"Supply in the scrap markets is tighter because less consumer goods are being bought in Europe and the US, which are wrapped in recyclable PE.
"The Chinese government has apparently also tightened up regulations on scrap imports after concerns were raised over health risks."
The scrap factor could be important as over the past 2-3 years, the steep rise in recycled material has taken around 4-5 percentage points a year off virgin polymer growth.
Also, once polymer prices go past $1,000-1,200/tonne it becomes economic to ship in scrap polymer and convert, according to one source.
Take away this automatic price-capping mechanism and you could have another reason why prices have risen by so much since mid-February - and why production and imports are both up.