Heading for the high jump
Source of picture: www.commons.wikemedia.,org
By John Richardson
CHINA'S polyethylene (PE) market looks as if it has gone a little pear-shaped as a result of high inventory levels and buyers anticipating the long-awaited flood of new supplies.
Further factors are labour shortages affecting processors and manufacturers and anxiety over whether the government will take more economic cool-down measures.
Before the Chinese New Year (CNY), I was told by a couple of global polyolefin producers and a Singapore-based trader that stock levels were high in China.
Immediately after the holidays there were reports of low stock levels as prices rose.
The price recovery lasted only a few days and now we are into the third week of falling prices.
Last Friday, ICIS pricing assessments showed further declines across all grades of polyethylene.
Low-density polyethylene (LDPE) film-grade prices were down by a further $30/tonne to as low as $1,350/tonne CFR China, for example. HDPE film had slipped by $10/tonne to $1,300-1,390/tonne CFR China.
The truth about inventories might be that they were high after all before the CNY if you counted cargoes already booked that had yet to arrive.
Now, in a sign of what might be harmful trader panic, we are seeing resin that had been shipped to China re-exported to destinations as far away as Latin America.
"I'm told there are large inventories of resin in China that are now being re-exported to Latin America," said my colleague David Barry, who is our Houston-based US PE editor.
"This type of trade could last a few more weeks or it could last until May, depending on who you ask. "
China often re-exports resin at times of market stress, but the fact that large volumes of shipments are being reported is worrying.
"The traders involved are going to lose money as container freight rates have recently risen on ship owners taking smaller and older vessels off-line in order to make the economics of big, modern ships work," said a source with a North American polyolefin producer.
"But even without higher freight rates, this kind of trade is about minimising losses."
Resin buyers in China have recently cut back on orders because they believe that the long-delayed new capacity surge is finally picking up momentum, according to several traders interviewed by myself and follow ACC blogger, Malini Hariharan.
"The sentiment has changed. Although many of the new plants in the Middle East and China have yet to stabilise production, they are selling more cargoes," said a Hong Kong-based trader with a major Japanese trading house.
A further factor behind the drop in resin sales seems labour shortages.
Processors and finished goods manufacturers are reported to be unable to run at high rates because migrant workers have yet to return from the countryside following the CNY.
The debate is over whether this is a temporary problem or long-term - the result of government economic stimulus in western provinces raising incomes and creating more job opportunities.
As for fears over the economy affecting the mood of the PE market, this seems to be result of last week's announcement that house prices had surged by 10.7% in February, the biggest increase in the last 20 months, as the inflation rate also rose.
Watch out for a closer look at China's property market later this week.
Suffice to say here, concerns expressed by PE market players to our ICIS pricing team of imminent interest rate hikes seem a little overblown.
While the high house-price inflation number is a concern, the number of properties sold fell in January-February, suggesting measures already taken to slow the sector down - such as higher land sales taxes - are working.
Economists I have either spoken to, or whose reports I have read, including the authors of the excellent China Economic Quarterly, think a rate hike won't occur until Q2 or the second half of the year.
But, of course, if you are trader looking to acquire inventory, rather than one of the poor mugs trying to flog the stuff to Latin America, it's always worth seizing on another reason for bearish sentiment.