By John Richardson
POLYOLEFIN end-users in China and Southeast Asia began to re-stock in significant numbers last week on anticipation that supply is going to remain tight for the next few weeks at least, the blog has been told.
“There was a feeling among the converters that because of scheduled maintenance work in August and September, prices had the potential to continue increasing,’ said a Singapore-based source with a major producer.
Restocking activity has driven further price increases. Polyethylene (PE) rose by $10-50/tonne and polypropylene by $10-70/tonne in Northeast and Southeast Asia for the week ending 29 July, according to our colleagues at ICIS pricing.
The change in the market will come as welcome relief to several traders who started to build stocks during the week ending July 8, in anticipation that the converters would eventually have to bite.
However, one converter in China was reported to have built two months’ worth of stocks last week with the intention of withdrawing from the market once he reaches two-and-a-half months of inventory.
“This is quite unusual as processors have only been keeping stocks of about one month for most of this year because of all the uncertainties in the market,” the source with the producer added.
Several other end-users had also started building untypically high inventory levels, a Singapore-located trader told the blog.
This suggests to us that a transfer of risk – from the traders to the end-users – might have taken place rather than any fundamental, long-term improvement in the market.
Healthy inter-trade business was also reported to have taken place last week, added ICIS pricing. This suggests that some traders may have added to their exposure.
The demand outlook would have to get a lot better for any fundamental change to occur.
“Re-exporters from China (those who manufacture finished goods from imported resin) have seen a slight improvement in their orders, but you would expect this as we are entering the peak manufacturing season,” the trader added.
“But generally speaking, there are no safe havens for export-based converters these days. Demand is weak in the US, Japan and Europe because of all the macroeconomic problems.”
At least it looks as if the US politicians are not going to shoot themselves in their collective head. Latest reports indicate that a deal to lift the debt ceiling has a good chance of passing through Congress and be signed by the President before the 2 August.
If not, reports indicate the US might be able to carry on meeting its debt obligations for a few days beyond 2 August – until the negotiations are successfully concluded. This re-affirms what we had been told.
Oil prices and stock markets will inevitably enjoy a relief rally if a deal is reached.
Lifting the debt ceiling might also improve US manufacturing and consumer confidence and therefore the strength of the peak manufacturing.
But dreadful US macroeconomic data that was released late last week – including a downward revision of second-quarter growth – point to a very weak economy.
And even if a debt-ceiling deal is reached all the signs point to S&P stripping the US of its triple-A debt rating. This would increase interest rates and, as a result, further dent US GDP growth with further global consequences.
The head of the world’s largest bond investor – Mohamed El-Erian of Pimco – told US broadcaster ABC yesterday: “Things that need to happen are not happening fast enough. If S&P sticks to what it said, it will downgrade.”
And so the mood in the polyolefin market remains uncertain, nervous and resiliently pessimistic – especially when you add in the prospect of more monetary tightening in China.
“My gut feeling remains that this price rally will probably not last and that if we push it too hard, we will bring the recovery to a very abrupt halt,” added the Singapore-based trader.
“Affordability remains the issue for many of the converters in China because of the increases in interest rates and bank-reserve requirements.”
Interestingly, though, converters in Southeast Asia serving local consumer-goods markets are doing considerably better, he added.
“They are not constrained by the same credit issues and local economies are still booming. For example, in Indonesia the converters are working three shifts a day to keep up with local low-end packaging demand.”
But no nation is an island and the blog feels that the macroeconomic headwinds are too strong for the polyolefin price recovery to last that much longer.
The question, of course, is how much longer.
“I think we should be alright until September or October because supply will remain tight until then, not only on the scheduled maintenance work but on production problems in the Middle East,” added a second trader, who is based in Hong Kong.