By Malini Hariharan and John Richardson
The spread between high-density polyethylene (HDPE) film grade and linear-low density PE (LLDPE) prices in Asia has steadily widened over the last five months to hit a high of $110/tonne, raising questions on how long this can continue.
LLDPE has been consistently cheaper than HDPE since May, a reversal of a trend seen since August 2009 when LLDPE turned expensive.
The main reason for the fall in LLDPE prices is ample availability from new plants and also older swing plants, which maximised LLDPE output to take advantage of the high prices seen through 2010. Improved availability of co-monomer butene-1, which was a major constraint in 2009-10, also helped producers ramp up LLDPE production.
The increased availability has come at a time of weak demand. Additionally, prices in China have also been negatively influenced by the persistent fall in futures prices on the Dalian Commodity Exchange as a result of the global economic turmoil.
The situation in China has worsened to a point where local producers have been pricing LLDPE below import parity levels to keep imports under control. The country had imported around 274,000 tonnes of LLDPE in August, 59% higher than in July.
Another reason for the surge in LLDPE imports - along with greater availability from Middle East plants - is reportedly because material stored in bonded warehouses for several months was cleared from those warehouses in August. This was due to traders cutting their losses as a result of the declines in pricing.
According to the blog's colleagues on ICIS pricing, LLDPE domestic prices were at CNY 9,500-9,750/tonne yesterday. LLDPE prices into China were assessed at around $1,235/tonne cfr China main port last Friday, which works out to a landed price of approximately CNY9,960/tonne.
Swing producers have already started contemplating shifting their production focus to HDPE, but it is likely to take a few weeks or months for the impact of such a move to influence markets.
Until then, ample availability and negative sentiment will continue to exert downward pressure on prices of LLDPE and also other polymers.
The news from China remains depressing with reports circulating this week about fresh difficulties in issuing letters of credit (LC).
In a policy introduced last month as part of the government's credit tightening measures to curb inflation, five state-owned commercial banks were forbidden to issue LCs with 30-90 days credit from 20-30 September in Ningbo. There has been no official confirmation yet on whether this regulation will be relaxed in October. If it continues, it is likely to further squeeze small and medium-sized enterprises (SMEs) as deals can only be settled in cash or LC on sight.
The blog heard last night how the restrictions on LCs are also affecting the Shanghai region.
The reason for the reduction in the availability of LCs is apparently because the banks have to include LCs on their register of loans. As a result, trade finance is for the first time being used to calculate their reserve requirements. The minimum reserve requirement - a percentage against the total loan book - has been constantly increased over the last 12 months as China fights inflation.
Developments in Wenzhou, Zhejiang, where debt-burdened owners of small factories have fled and factories shut, have caught national attention. The city council has estimated that one fifth of the 360,000 SMEs in the city have stopped operations due to financial difficulties. The hope now is that the central government will intervene to step up support to troubled SMEs, following the limited help already provided in Zhejiang province and Shanghai city.