By John Richardson
IS China's polyethylene (PE) market going through a temporary lull or are we seeing a sea change in conditions that could spell problems for the rest of this year? This was the question, to paraphrase Hamlet, facing the global industry late last week as lacklustre post Chinese New Year (CNY) demand continued.
As we wrote about last week, trader inventories in bonded warehouses are high as a result of imports before the New Year proving to be excessive.
We wrote in that same post that job-hopping after the holidays was restricting the ability of converters and finished-goods manufacturers to run at high operating rate.
But a much more important reason for the weak demand is bank-lending restrictions, according to Rainy Ma, our polyolefins expert in Shanghai, who works for ICIS Chemease.
"Converters and finished-goods producers have the orders, they just cannot get the working capital," she told the blog.
China has increased bank-reserve requirements twice this year with the latest announcement made last week. It has raised reserve requirements eight times since the start of 2010 in an attempt to cool the economy down.
A further factor behind moribund pricing - which as this ICIS pricing graph showed either remained flat or only edged up slightly last week - was the wide gap between offer prices from overseas producers and domestic bids.
The overseas producers we have spoken to continued to claim tight supply across several grades and, of course, higher raw material costs, as reasons not to budge on their pricing (see below for some analysis for producer margins).
Whereas import prices were more or less flat, there were some reports of declines in domestic pricing.
This was the result of traders off-loading cargoes from those overfull bonded warehouses in order to repay 90 day letters of credit due in March-April, the blog was told.
The traders were also continuing to re-export resin to South America and Vietnam in an attempt to tighten the market and to, of course, make some money.
High US ethylene prices have recently made exports difficult for the country's PE producers, including backyard shipments to South America.
Margins for Asian integrated low-density PE (LDPE) and high-density PE (HDPE) producers improved last week, according to the ICIS weekly Asian PE Margin Report.
LDPE margins rose by $48/tonne to their highest level since February 2010 with HDPE margins $65/tonne higher.
Improvements were the result of better co-product credits, particularly butadiene - which has been the case for several weeks now - while naphtha costs remained flat.
But it is polyethylene that over the long-run is the main economic driver of any steam cracker and so what is happening in China will remain a big source of concern.