By John Richardson and Malini Hariharan in Shanghai
A TWO-TIER China polyolefin market had developed in China over the last couple of years - but the $64,000 question right now is: At which of these two levels will most business be settled during December?
The ever-volatile Dalian Commodity Exchange determines the day-by-day sentiment, while overseas producers have long been very effectively managing production in an effort to set physical pricing.
They are being supported by tightness in specific grades such as butene-1-based linear-low density PE (LLDPE) and extrusion-grade low-density PE (LDPE). This tightness can be due to luck rather than just good management.
And so even as the Dalian tanked late last week on worries over more inflation-tackling measures by China's government, overseas producers were reported to be preparing to raise offers for December material. Their attitude on certain grades seemed to be "take it or leave it" because of their claims that they are holding very-limited stocks.
Will they be successful?
On the positive side of the equation are reports from our colleagues at Shanghai-based pricing and news service CBI that Sinopec is to cut polyolefin production in December by 10% (equivalent to 100,000-150,000 tonnes each of PE and polypropylene).
Source of picture:www.willgoto.com
This decision is apparently about helping to relieve China's diesel shortage or is to do with reaching the 11th Five-Year Plan emissions cuts targets - or maybe a bit of both. Watch out for our post tomorrow when will go into this story in more detail.
Our colleagues at ICIS pricing also say that December allocations from PetroRabigh to China are expected to be cut by 50% because of yet-more production problems at the Saudi Aramco/Sumitomo Chemical joint-venture complex.
But converters were reported by a producer to be reluctant to buy, resulting in all of his recent sales being to converters and distributors.
What is making the converters hesitant could be the rapid rise in prices since July. Up until late November PE and PP had risen by 22-29% contributing to an unexpectedly robust Q4
During the same period naphtha rose by 28% and crude by 19% - indicating that a substantial portion of the increases have been feedstock-cost driven.
Click here for a graph - PriceRisesSinceJuly.ppt
Add to this the perennial worry about how much polyolefin consumption is the result of trader speculation on attempts to cash-in on a stronger Yuan, and we are back once again to the well-worn and somewhat tired bubble theory.
"End-users pick up their newspapers every day read about the inflation threat in China and possible further government tightening measures," said an industry source.
"The other big macro-economic threat worrying everybody is bank problems in Ireland."
Perhaps some end-users are therefore worried about a sudden collapse in crude-oil prices.
Hedge funds make up a large percentage of current open interest on the oil market, according fellow blogger Paul Hodges.
He writes that they could very quickly head for the hills if sentiment turns, driving oil to as low as $60/bbl.
Converters might well also be worried about the strength of resin demand next year as there are reports that the Chinese government plans to raise interest rates twice more before July 2011 in the battle against inflation.
The big four big state-owned banks recently announced that they have already fulfilled their 2010 quota for lending to real-estate buyers and will not making any further loans this year.
Beijing's Renmin University has warned in a report that government restrictions on the sector could lead to a 20% fall in property prices next year.
If you are converter you also know that a lot more new polyolefins supply should be just around the corner (how long have we been saying this, though, only to be proved wrong by all the production problems?).
December demand is receiving support from agricultural film buying - but history shows that this is generally an off-season.
Plus January is just around the corner - when business quietens down ahead of Chinese New Year (CNY) which falls on 2 February.
A reflection of this uncertain direction is that our colleagues at ICIS pricing left their price assessments for PE and PP in China largely unchanged last Friday.
This is reflected in, as we've said, the producer we spoke to only being able to sell to distributors and traders.
He said that price increases since July had been too rapid - and that further increases of above $50 a week would be very hard to achieve.
This suggests that the customers of the converters - the wholesalers and retailers - are also feeling very uncertain at the moment.
Their uncertainty was evident at the Canton trade fair in October, he added.
(The bi-annual trade fair is a crucial barometer of the strength of overseas demand for China's manufactured goods).
"Order periods were shorter than the previous fair in May because the wholesalers and retailers haven't got a clue where their raw-material costs are going."
Another factor might be the added volatility in the value of the Yuan versus the US dollar as a result of QE2 and macroeconomic uncertainty.
Macro-economic concerns feel as if they dominate at every level of the polyolefins business at the moment.
So we wager that producers will fail in their bid to raise December prices - and that, in fact, further reductions are on the cards over the next few weeks.