By John Richardson
WHILE ethylene prices rose to a 14-month high last week on very expensive oil and the Shell Chemicals outage in Singapore, the ICIS pricing C2 margin report calculated a staggering $134/tonne fall in Northeast Asian margins. Rising naphtha is clearly not being passed on down the chain.
Meanwhile, low-density polyethylene (LDPE) margins in Northeast Asia plunged by $163/tonne to the lowest since November 2009, according to ICIS.
Northeast Asian integrated margins plummeted by $142/tonne.
This reflected a persistently weak China PE market that we have been writing about since the Chinese New Year. Pricing had been mainly flat-lining since the holidays up until last week, but last Friday was assessed lower - by $10-30/tonne.
One of the problems in China is that while efforts are still being made to re-balance supply and demand by re-exporting material from China, arbitrage appears to be closing.
"Pricing in Europe, Southeast Asia, Turkey and Latin America is coming more into line with that of China," a polyolefins trader told the blog last week during our latest visit to Singapore
"At the moment some cargoes are still moving, but I am worried these could be the last for a while. Inventory levels in the China bonded warehouses are still too-high."
One of the causes of the bad market since the New Year seems to be that traders bought too much material in January because they thought prices had a lot further to rise.
Polypropylene (PP) had fared slightly better up until last Friday.
"The positive thing from the perspective of the producers is that PP remains tight. Propylene affordability and availability is a big issue and there have been yet-more technical problems at a propane de-hydrogenation-to-PP complex in Saudi Arabia," the trader added.
"I don't think PE is as quite as tight as PP, although there is a lot of Asian capacity down right now because of the cracker turnaround season," added a source with a major producer.
"The shutdown season comes to an end in May. So potentially, unless there are some tough decisions made to extend maintenance work and/or resume production at low rates, a big extra slug of supply is heading our way."
The market has yet to see any evidence of more PE heading out of Saudi Arabia as a result of greater associated gas availability.
But it seems only a question of a few weeks before the extra volumes arrive. Saudi Arabia always runs at the maximum rate that feedstock availability and technical issues allow.
More output from other Middle East OPEC members seems logical also.
The demand outlook in China looks grim as everyone continues to search for an explanation as to exactly why it is so grim.
"It could be simply the case that we imported too much resin and the end-users know that so they are sitting on their hands," the trader added.
"Our ability to make the situation any better - and make some very nice money in the process - is about to disappear because, as I said, I think re-export arbitrage is about to close."
Or is it more because there is something wrong with the fundamentals of demand? The end-users would surely be unwilling to sit on their hands for such a long period if orders from their customers were good.
We have been picking up reports that credit is tight among the converters and fabricators for five weeks now.
The 'shadow banking system' theory challenges this view. But perhaps because converters are mainly small -and medium-sized companies, they cannot afford the higher interest rates that going through the shadow system entails.
Plus with resin prices so high it is a big risk to borrow money at, say, nine or ten percent with a significant price fall possibly just around the corner (last week's price declines might indicate it has already started).
This risk aversion also applies to the speculators in the physical market and the Dalian Commodity Exchange who have been a major force behind strong demand growth since H2 2009.
"To me it feels like 2008 all over again. I wish I had realised this before overbuying in January," continued the trader.
"Prices, in retrospect, have gone up by too much to quickly and we were all gambling on the rally continuing after the Chinese New Year. But this hasn't happened because inflation is now the big issue in China. The end-users cannot pass on any further cost increases."
If credit keeps expanding through the shadow banking system, inflationary pressures might get worse.
One of the big global threats is that oil prices fall quite sharply in H2 on the end of quantitative easing and interest-rate increases in the US.
There are also so many other uncertainties out there, including, for example, unrest in the Middle East, the longer-term implications of the Japanese earthquake and tsunami and sovereign debt risk in Europe
China seems to be more closely watching the world right now as well as the world watching China.
This is the result of the Dalian becoming the price setter for all domestic grades of PE.
Speculators, if they want to make excellent money, are playing on every available shift in sentiment, including those that occur both locally and overseas.
And as the bigger converters play on the Dalian, this means they have become much more attuned to international events.
"Overall I remain bearish. I made my money in Q1 and plan to be cashed-up in the second quarter and quite possibly into the second half if what you say about the Fed and oil prices comes true," said the trader.
The blog thinks that this is a very wise approach for all of us.