China PE/PP import prices, crude futures correlations weaken

Focus story by Chow Bee Lin and Amy Yu

SINGAPORE (ICIS)–The short-term correlation between China’s import prices of polyethylene (PE) and polypropylene (PP) and the global crude futures has weakened, as local polyolefins futures, domestic coal-based resins, and the regional supply balance have more influence on local buying decisions, traders said.

The resilience of China’s PE and PP import prices were reflected in the relatively small losses made in August amid falling crude futures, the traders said on Monday.

The WTI front month crude and the North Sea Assessed DTD BFOE crude prices fell by 1.7% and 1.8% in August, according to ICIS.

But China’s weekly average import prices through August were just 0.2-0.9% lower for different PP homopolymer grades, and 0.5-0.8% lower for high density and low density PE grades (HDPE/LDPE), according to ICIS.

The weekly average import prices of linear low density PE (LLDPE) in China fell by 1.7% through August, but the losses were mainly driven by increased domestic supply contributed by two new coal-based PE plants that came on stream in July, namely the Shaanxi Yanchang Petroleum Group and the China National Coal Group, industry sources said.

The weekly average import prices of PP block copolymer and random copolymer grades in China rose by 0.6% and 0.9% in August respectively, ICIS data showed.

The gains were mainly driven by supply concerns triggered by the scheduled maintenance shutdown of Formosa Chemicals and Fibres’ (FCFC) plant in Taiwan and HMC Polymers’ facility in Thailand in July, and the production cutback at IRPC’s plant in Thailand the same month.

Crude futures is still an important consideration because most Chinese PE and PP producers use naphtha feedstock, so the recent downtrend in crude futures had somewhat dampened sentiment in the PE and PP markets.

But its immediate impact has weakened compared with previous years as crude futures are increasingly seen as less relevant to the prevailing spot PE and PP import prices, given the long production cycle from crude oil to PE and PP resins, Chinese traders said.

Buyer sentiment in China is more often swayed by trends of the LLDPE and PP flat yarn futures traded on the Dalian Commodity Exchange (DCE), as indicated by the high correlations between the spot and futures prices of these resins, they said.

Coal-based capacity accounts for small fractions of China’s total capacity, estimated to account for 12% and 24% of the country’s PE and PP capacity respectively by the end of 2014, according to ICIS-Chemease, an ICIS service in China.

But the online sales tenders issued by Chinese coal-based producers and the subsequent transactions often dampen domestic market sentiment, which often spills over to the import segment, the Chinese traders said.

Transactions in those tenders have significant impact on buying sentiment in China because they are widely known in the market, and the concluded prices tend to be lower than prevailing market prices because coal-based plants have a feedstock advantage over other local plants which are mostly naphtha-based, they said.

Heavy turnarounds of local PP plants in August and September have also provided much support to market sentiment, preventing the import prices from falling in tandem with crude prices, local traders said.

A number of recently started up local PP plants have been taking longer than expected to ramp up production, and that also helped to support the import prices, they said.

International crude prices may have lost some of its influence on China’s PE and PP resin import prices in the short term, but it is expected to remain a key price driver over a longer timeline because a majority of the PE and PP plants in China are still naphtha-based, they added.

Additional reporting by Doreen Zhao