By John Richardson
THE blog would sincerely like to find evidence that it has been wrong and report a strong, sustainable recovery in China’s polyethylene (PE) market.
Alas, however, the rise in pricing of around $100/tonne over the last four weeks appears to have been almost entirely the result of increased trader activity and producers raising offers in response to higher feedstock costs.
Converters have yet to return to full production two weeks after the end of the Lunar New Year holidays, which, to us, suggests an extreme nervousness over the economic outlook. Would you really want to stock-up on resin when there is every chance that there could be more economic consequences for China from the European sovereign debt crisis? Last week, the International Monetary Fund said if Europe was to suffer a severe recession, never mind a Greek default, China’s 2012 GDP (gross domestic product) growth could fall a full four percentage points below its base case of 8.2 percent.
Ironically, if growth really did threaten to be only in the region of 4 percent this would be excellent news for chemicals and polymers in the short term. The Chinese government would almost certainly be forced into another huge round of economic stimulus on the lines of 2009-2010, but this would, of course, create more inflation and bad-debt problems.
Right now, an edginess, nervousness and a general lack of confidence persists, with strong arbitrage to the US and Latin America offering some compensation.
“Nothing short of a gaping chasm has also opened up between US and Latin American pricing,” said a Singapore-based polyolefins trader.
US linear low-density PE (LLDPE) butene film-grade contract pricing for February was, for example, settled at 71-74 cents/lb on a delivered basis – $1,562-1,628/tonne CFR. This compares with spot pricing of just $1,260-1,340/tonne CFR Northeast Asia/Southeast Asia, according to ICIS pricing assessments for the week ending 10 February.
Not surprisingly, therefore, there are reports of the feedstock cost-pressured South Koreans selling more material in Latin America – and also even in the US, via bulk container shipping. This avoids the extra labour costs, often an effective trade barrier, of moving product in bags that have to be opened and the pellets loaded into railcars for delivery to end-users who store inventory in silos.
The South Koreans, as was the case last year, are only able to sell limited volumes to China because they are being undercut by Middle East competitors.
“South Korea was the No1 exporter of high-density polyethylene (HDPE) to China in 2010. It has now slipped to No3 behind Saudi Arabia and Iran,” said an industry source.
Tight polyolefin supply and lower ethane costs have enabled US producers to achieve excellent margin gains since January.
The question now, though, is whether they have already killed golden egg-laying goose.
“I think people are going to be backing out of this month in a heart beat,” a trader told ICIS Chemical Business, commenting on the 24 percent increase in US February polypropylene (PP) contract prices.
“It is going to crater demand. You can’t raise prices 24 percent in one month and just have everybody stand in line and order as much as you can make.”