By John Richardson and Malini Hariharan
CHINA’S polyethylene (PE) and polypropylene (PP) production surged in January-June this year as imports remained strong and demand growth declined, according to the Shanghai-based commodity information service, CBI.
Hopes being expressed that pricing might have bottomed-out therefore seem a tad premature – especially as Asian cracking operating rates are reported by ICIS pricing to still be at 90-100%.
The graph below shows the steep increase in polyolefin production as new Chinese capacity came on-stream.
Domestic production was up by 30% with total polyolefin imports rising by only 1%.
You can argue, though, that there should have actually been a substantial fall in January-June imports – given the much-stronger local production.
In addition, 2009 import levels reflected an exceptionally strong market: 2009 PE demand growth was 30.3% and PP 26%, said CBI.
These extraordinary increases were the result of a temporary boost given to demand by re-stocking, the decline in recycling and huge and unsustainable government economic stimulus.
It has been clear from January of this year that growth in bank lending in China would be reduced, with restrictions introduced since then that have successfully cooled-down the real-estate sector.
In January-June, apparent demand growth (domestic production plus imports) for polyolefins was 20%, according to CBI.
But the information service estimates that actual demand growth – when you remove stock building – was no higher than 10%.
Despite what are arguably very strong imports in the context of higher local production, overseas shipments have fallen for three consecutive months since they peaked in March – a clear indication of inventory indigestion.
Low-density PE (LDPE) imports fell to 91,000 tonnes in June from 116,000 tonne in May, according to the New York-based trade data and analysis magazine, International Trader Publications.
Linear-low density PE (LLDPE) shipments slipped to 151,000 tonnes from 162,000 tonnes.
High-density PE (HDPE) imports declined to 245,000 tonnes from 267,000 tonnes.
PP imports, however, rose slightly to 303,000 tonnes from 292,000 tonnes. This suggests that a long-term decline in propylene availability, which we discussed last week, could be helping to prop up the market slightly.
The question now is whether the overall Chinese market is about to recover.
Cautious optimism was evident this morning as a trader told the blog that he believed prices might have bottomed out. This was in line with what my colleagues at ICIS news were told late last week.
But he was unable to offer a clear view as to whether the inventory overhang - which as we’ve said is likely to be particularly acute in PE – has been consumed.
The trader was basing his optimism on a recovery in crude-oil pricing and a corresponding rebound in the Dalian Commodity Exchange LLDPE futures contract. Crude could easily decline again on the uncertain economic climate.
Operating rate cuts at Asian liquids cracker are still being discussed, which, in the end might be the only way to bring the market back into balance.
Permanent and substantial shutdowns of high-cost Asian capacity, talked about for so many years, might now have to take place.