In the second part of our analysis of the effect of China's latest interest-rate rise we look at how the polyolefin market has alllegedly taken the decision in its stride. Crude markets are a different story altogether....
By John Richardson
CHINA'S polyolefin market has improved over the last week thanks to a recovery in oil prices and anticipated tighter supply of polyethylene (PE) and polypropylene (PP).
A euphoric trader told us this morning that pricing for physical cargoes across many grades had increased by $50-100/tonne over the last week.
"It is about time as business has been flat for so long. The market has taken the latest interest-rate rise in its stride," he said.
"All the bad news that can happen this year has already been priced-in."
Linear low-density (LLDPE) futures prices on the Dalian Commodity Exchange had risen by around Rmb400/tonne since last week, he added.
But a source with a major global producer was less upbeat. He said that in general prices for physical cargoes had risen by only $50/tonne over the last week, and added: "The recovery is very welcome but nobody should be popping any champagne corks. We are a long way from being out of the woods."
One very good reason to keep the bubbly on ice is the increasingly erratic nature of crude-oil markets.
When pricing was heading in a clear upward direction earlier this year, as we have already discussed on the blog, chemicals and polymer buyers built inventories.
Now, though, "buying forward" is a very-risky strategy, as illustrated by events over the last few days.
Oil started to rally late last week after Greece's parliament approved austerity measures.
This led to this extraordinary statement in a Bloomberg report from earlier this week, justifying stronger crude pricing:
"The economic outlook looks better and the Greek situation looks significantly improved and is no longer a major concern for people," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.
"That's giving people a lot of optimism about the economy in Europe and the US."
In the very short-term maybe this was true - until Moody's decision on Tuesday to downgrade Portugal's debt to junk status.
The downgrade and the latest interest-rate rise in China resulted in both Brent and WTI prices falling on Wednesday as equity markets also took a hit.
Oil markets had clearly not factored-in another rate rise in China, and are now reflecting concerns about what the battle against inflation will mean for economic growth in 2011.
PE and PP supply is set to tighten, however, as several cracker complexes are due to undergo turnarounds in August.
The maintenance work will see China's August ethylene production dip by more than 100,000 tonnes over July, according to this graph from the ICIS pricing World Ethylene Plant Report:
Shell Chemicals will reportedly continue to run its mono-ethylene glycol (MEG) plant in Singapore during an August turnaround at its cracker.
This will mean it will have to purchase around 40,000 tonnes/month of ethylene, potentially driving-up C2 and therefore PE pricing, ICIS news was told by market sources.
"The sentiment is certainly a lot better than a week ago and it looks if the slide in pricing has been arrested," continued the source with the polyolefin producer.
"Supply will be tighter in August. Linear low-density (LLDPE) and low-density (LDPE) demand will also pick-up during that month as a result of the start of the next agricultural film season.
"A week ago, people were talking about PE and PP pricing for several grades falling to below $1,000/tonne CFR China.
"But the credit problems remain in China, particularly for the small and medium-sized companies (SMEs) - which make up the bulk of polyolefin buyers.
"I have heard that the biaxially-oriented PP (BOPP) film sector has been particularly badly affected. The big scale of modern BOPP production lines means there is a requirement for a large amount of credit.
"Plus, I am very worried about the effect on sentiment when the full scale of the local government debt problem in China is recognised. Then we could see commodity and share prices falling by 5-10%."
Weakness in key end-use sectors such as autos is also adding to the problems caused by tighter credit.
Volatility in crude and the demand outlook is therefore likely to make any price recovery short-lived.