By John Richardson
RELATIVE to most of 2012 - when China's polyolefins market was in dire straits - November, December and early January have been excellent for traders who took the right positions. At least one producer has also reporting a strong recovery in sales.
"I thought there would be a mini-rebound in early November, and I was correct," said a Singapore-based trader.
"Prices then retreated slightly before a stronger rally began in late November (see chart below)."
The latest recovery is being driven by:
*Shutdowns in the GCC. The estimated production loss as a result of the confirmed plant turnarounds is 118,000 tonnes of linear-low density polyethylene (LLDPE), 353,000 tonnes of high-density PE (HDPE) and 238,000 tonnes of polypropylene (PP), according to ICIS.
*Outages at the PetroRabigh and Daqing petrochemical complexes in Saudi Arabia and China, respectively. The Daqing outage is expected to last until around February and includes the company's 300,000 tonnes/year HDPE/LLDPE swing plant and its 250,000 tonnes/year HDPE facility. The PetroRabigh complex is expected to restart in late January. Offline at the moment are the producer's 600,000 tonnes/year LLDPE plant, its 300,000 tonnes/year HDPE unit and its 700,000 tonnes/year PP facility.
*Reports that Northeast and Southeast Asian cracker operators have cut capacity utilisation from more than 90% in November to around 85% in December/January. But, as we have just said, these are just reports, and there are suspicions that some South Koreans are continuing to run hard.
*Confidence amongst converters that China's new leaders mean business on economic reform.
*Low stocks amongst the converters, especially those who need to fulfil orders before the Chinese New Year, which falls on 10 February.
*The fiscal-cliff fudge. This has caused a rally in stock markets, in oil (Brent crude was up by $3 a barrel last week) and commodity prices in general. Iron ore, for instance, is now more than $153 a tonne. "Prices are up by around 70% over the last four months, and the rally gained extra momentum in December. This is mainly the result of misplaced confidence in a sustainable Chinese recovery," said a Perth-based investment analyst.
"Is there a real improvement in polyolefins demand or is this the result of short-term tight supply and an improvement in sentiment?" queried the Singapore trader.
"Quite frankly, I don't really care as I've made good money since November and can now afford to play very cautiously over the next couple of months, without worrying about missing out on anything further."
Reasons to be cautious about the sustainability of the recovery include:
*The end of turnarounds in the GCC in February-April and the resumption of production at PetroRabigh and Daqing.
*Substantial amounts of new capacity. ExxonMobil is expected to ramp up production at its two 650,000 tonnes/year metallocene LLDPE plants and its 450,000 tonnes/year PP facility in Singapore, now that its 1m tonnes/year cracker is being commissioned. China is also set to bring on-stream significant amounts of polyolefins capacity this year, including Sinopec Wuhan Petrochemical Co at Wuhan in Hubei. "We have heard that the complex's 300,000 tonnes/year LLDPE plant and its 400,000 tonne/year PP plant will start-up in early Q2," the trader added.
*The fact that stock and commodity markets also rallied in 2009, 2010, 2011 and 2012, only for the rallies to peter out.
A key question for the blog is: When will stock and commodity markets start worrying about the likelihood of a bitter and prolonged fight between Republicans and Democrats over the need to raise the US debt ceiling?
The fiscal-cliff fudge has left the two political parties even further apart, with the Republicans also blighted by deep internal divisions.
By late February or early March, the Treasury Department will run out of options to cover US debt and could begin defaulting on government loans unless Congress raises the legal borrowing limit - the debt ceiling. Economists warn that a default could trigger a global recession.
As far as China's new leaders go, the blog feels they will attempt a "steady as she goes" policy over the next few months, possibly even the rest of this year, as they try to shore up their support.
Modest stimulus, along with more of the right noises about economic reform, might well be the desired approach. This doesn't necessarily mean that genuine reform will be sufficient to put China on the right economic path.
If the external environment weakens substantially, however, (for example because of a US debt default or a new crisis in Europe), Beijing may be forced into a big new stimulus package - adding to concerns about inefficient investments and bad debts.
More immediately, factor in a possible bounce in confidence when the official purchasing managers' index for January is announced in early February, as the December PMI is said to have been manipulated downwards in order to store up some more good news.
Returning to polyolefins, a source with a global producer told us: "From late February/early March, when the Chinese New Year is over, plants have returned from turnarounds and new capacities start to come on-stream and the debt ceiling issue has come to a head, we should get a real idea about the strength of demand."
Note that markets in China are expected to quieten down from 15 January, ahead of the New Year, until late February.