A post-Chinese New Year dream....
Source of picture: http://www.scsa.net.au/
By John Richardson
The large amount of polyolefins delivered to China over the past few months is causing further head-scratching and anxiety among producers and traders.
One view, well rehearsed previously on this blog, is that this is further evidence of a speculative bubble that will pop as a result of tighter bank lending in China.
There might be even more pressure on this "bubble" following China's 12 February decision to raise bank-reserve requirements for the second time in a month.
However, some economists argue that was only to be expected, and is a regular tightening exercise that takes place post Chinese New Year (CNY) to even-out lending. There is traditionally a surge in lending ahead of the CNY.
The big anti-inflationary step, which has yet to happen, would be to raise deposit and/or lending rates, they argue.
Returning to polyolefin markets, the optimistic view is that widely reported high inventory levels will be quickly absorbed when CNY comes to an end (the official holidays in China run from 14-19 February).
High stocks are being reported both in bonded warehouses (for imported US dollar-priced material) and in other warehouses (for locally, yuan-priced product).
"Around 1.3m-1.4m tonnes of polyolefins were delivered to China in December and a further 1.3m-1.4m tonnes in January, according to our analysis," said a Singapore-based trader, who is among the optimists.
"Although China's imports of many products are generally high in December, prior to a slowdown for the [Lunar New Year holidays] in January/February, the volumes this December were exceptionally high," said Jean Sudol, president of US-based trade-data analysis service, International Trader Publications.
This suggests that there might be inventory pressures in China in more than just polyolefins, given that January is always a quiet time for demand across the board.
So what drove reports of in the context of what is already going to be a stellar year for shipments to China?
"In early November, linear low density polyethylene (LLDPE) prices for physical cargoes were below those on [the] Dalian for the settlement month of May 2010 and beyond," said the trader.
(China's Dalian Commodity Exchange offers monthly futures contracts in LLDPE film up to a year ahead. The contracts have become an important indicator of sentiment and therefore physical price direction).
"The stronger futures pricing in early November reflected crude increasing to around $82/bbl and forecasts from banks that it would reach $95-100/tonne in 2010," he added.
"It was also down to confidence that Chinese growth would remain very robust in 2010.
"[The] Dalian is used as a proxy for the direction of all physical polyolefin pricing, and so we saw a lot of interest from traders in acquiring all grades of PE and polypropylene (PP) to ship to China, after this early November turning point."
Low density PE (LDPE) was also buoyed by very tight supply due to outages, he said.
This analysis of what drove increased imports and prices in November-January was supported by a source with a major global polyolefin producer.
"It's easy to assume high inventories in China indicate a bubble, but I am not that sure," said the source.
"On the growth side, yes, measures have already been taken to cool the property sector. There might also be a little less easy money available to fund speculation and discretionary spending on consumer goods.
"But I think this will be replaced by further strong consumption growth in less-developed regions, and huge government infrastructure spending throughout China.
"Infrastructure projects launched last year have yet to be completed with more spending on roads, railways etc still to come."
The Singapore-based trader and the source with the producer both point to the absence of panic among the Chinese traders and distributors holding high stocks.
"Nobody is in a rush to liquidate. The reason is that despite the credit tightening, possible US restrictions on proprietary trading by banks and more anxiety over European government debt problems, polyolefin pricing has only edged down since late January," said the trader.
Prices for several grades of PE in Asia fell by $10-50/tonne for the week ending 5 February, according to ICIS pricing. PP remained either stable or increased by $20-30/tonne, depending on the grade.
Both PE and PP pricing were reported to be stable for the week ending 12 February as the Asian market was closed for the Lunar New Year holidays.
One might well ask what on earth the connection is between a possible US clampdown on investment banks, sovereign debt issues in southern Europe and polyolefin pricing.
"The link is that on a day-to-day basis at least, sentiment in wider commodity and equity markets is playing an increasing role in what people are prepared to pay for polyolefins," said the producer.
Low producer inventories outside China are a big factor behind why pricing has only eased slightly since the gloomy macroeconomic news broke, said the trader.
"Producers have managed their stocks so well that they can afford not to budge on what is pretty much theoretical pricing at the moment, as the market is so quiet ahead of the [Lunar New Year]."
Concurring with the producer's view on continued strong economic growth in China during 2010, the trader added: "As early as the first week of March, we should begin to see the strength of demand after the New Year.
"I think we will see these high polyolefin inventories easily absorbed as Chinese buying picks up ahead of the peak season for manufacturing finished goods, which occurs during the summer months."
Let's hope for everyone's sake that he proves to be right, as further strong support from China is crucial for the survival of this tentative, very nervy and very patchy recovery.