By John Richardson
THE sharp fall in polyethylene (PE) pricing in China is being blamed on speculative acquisition of cargoes by traders in March and a rise in local production.
Apparent consumption (imports plus local production) is reported to have surged to 1.7m tonnes in March and 1.5m tonnes in April compared 1.3m tonnes in February and an average of 1.3m tonnes per month in 2009.
These high numbers reflected both stronger imports than in January and February and successful stabilisation of production at several new plants in China. Domestic production is said to have averaged around 800,000 tonnes per month so far this year compared with less than 700,000 tonnes a month in 2009.
This is slightly different from the story we were told last week, when traders and producers were blaming excessive inventories on high overseas bookings dating back to as early as November-December of last year.
But as a senior industry source, who has worked in Asian polyolefins for 25 years, told the blog today: "You can obviously hold PE in storage for an unlimited amount of time - and there is a willingness in China to hold on for long periods - so the high stock levels could be a combination of both November-December and March bookings."
Interestingly, stock levels for polypropylene (PP) appear to be far lower with apparent consumption only around 1.1m tonnes/month in March and April - about the same as the monthly average for 2009.
"This reflects the fact that there are far more speculators in PE than PP, the reasons being bigger PE capacity and the ease of substituting PE for PP. PP is harder to substitue for PE because of shrinkage and other issues," the senior industry source added.
So why did the traders pile into PE imports in March at a time when it must have been very clear that local production had substantially increased?
One factor was probably confidence in the economy - somewhat undermined since by measures designed to cool-down the property sector.
My fellow blogger Paul Hodges also points out: "Don't forget that in Q1, Goldman came out with incredibly bullish noises about $96/bbl oil, whilst all the technicians were busy forecasting higher prices by end-June." (there were other equally bullish forecasts)
"If one was a trader on the Dalian Commodity Exchange (where a futures contract in linear low-density PE is traded), one would have seen the oil price rising in March - the bullishness of many analysts about the outlook for China and oil.
The problem is that futures and physical traders are one and the same so confidence in the Dalian might have been infectious - prompting the rise in imports.
The big question now is whether this is just a period of temporary indigestion or is the start of a sustained macro-economic and PE supply-driven downturn.
Cautious hope was being expressed late last week that pricing might have reached the bottom.
"I believe we are floating at the bottom of the market at this point and appropriate operating rate corrections will be made by producers to prevent further declines," said a source with a major North American-based global producer.
But Hodges makes a very strong case - as I have in the past but now remain slightly less convinced and a little more hopeful (or maybe I am living in cloud cuckoo land?) - that the game is over as the global economy weakens.