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China polyethylene inventories are high

Business, China, Polyolefins, US
By John Richardson on 28-Jul-2009




A Mars Bar feast in store if crude hits $30/bbl again


Source of Picture: Amazon.com




Polyethylene (PE) inventories in China at the second and third local distributor levels are at very high levels, two reliable industry sources have told us.


This has led to some confusion in the market as earlier reports indicated that inventories were in fact low – but this referred to stocks in bonded warehouses (imported material) and the first level of local distributors.


Speculating in polyolefins has been made a great deal easier by lax bank lending – contributing to a 51% rise in imports during January-May 2009 over the same months last year.


The US was able to raise low-density PE (LDPE) exports to China by 27%  in January-May and HDPE by a staggering 65% (up until end-March shipments were actually down by 3%, indicating how strong the buying spree has been since then on greater macroeconomic confidence, tight supply on shutdowns and rising oil prices).


Strong end-user has also added to the momentum. 


The booming construction sector consumed lots of high-density PE (HDPE) pipes.


We are also hearing reports of government investment in better disaster-preparedness – after the mistakes exposed by last year’s Sichuan tragedy – as being partly behind very tight HDPE yarn grade markets. Yarn grade is used to make tarpaulin for tents with the surface of the tents laminated by linear-low density (LLDPE) and LDPE.


Demand for agricultural film (LDPE and LLDPE) has received a boost from government initiatives to raise output on farms. One of the peak seasons for agricultural film demand is also about to start.


Lack of availability of recycled plastic is another major factor in the surge in demand for virgin resins.  


Recently, though, markets have become becalmed due to a classic buyer and seller stand-off.


Are we at one of those inflexion points or could the rally be sustained for some time yet?


I still think this won’t be a V-shaped recovery so it’s only a question of when there is another severe correction in pricing (of course, the same applies to the other polymers. I will look at PP over the next few days).


New supply will become the biggest factor in directing markets, but, according to some sources, perhaps not until as late as Q4 due to continued start-up delays.


But even if the new-output glut doesn’t hit the market until the fourth quarter -or perhaps even late – a collapse in crude might have already flushed the true level of Chinese inventories out of the system.


Or could more air be first of all pumped back into the crude bubble?


Premiums for long-dated US crude futures have grown dramatically since mid-July, according to this report from Reuters.


“The discount for front-month to second-month oil futures has nearly doubled since July 13, to $1.75 from 89 cents,” the report continues.


This shift in the forward curve might be big enough to trigger a new round of buy and store programmes for offshore vessels that were off-loaded in May when the curve moved in the opposite direction.


Bargain prices for very chartering Very Large Crude Carriers (VLCCs), which can help store up to 2m barrels of oil, could revive the offshore storage trend.


But the danger is that one day storage space might simply run out – or before that the cost of storage rises above that of finance. Cheap and easy lending, the result of the US government’s rescue of the banks, is one of the main reasons behind the rise in oil.


Before any of the above happens, the weak state of demand might be enough to topple the market.


OPEC is predicting a sharp drop in oil prices over the next few weeks because of the huge build inventories of crude products, according to this report in the Wall Street Journal.


Stockpiles of diesel and heating oil are at 24-year highs, leading to the possibility of more crude oil production cuts being announced at the next OPEC meeting on 9 September.


Venezuela, Iran and Angola are already apparently exceeding existing quotas, raising doubts over whether any additional cutbacks would work.


Further demand destruction seems likely because – as we’ve written about before – defaults on unsecured consumer debt, such as credit cards, could result in a second wave in the financial crisis.


“The real unknown is to what extent a recession on par with the 1930s will be turned into something much worse by consumer debt,” writes the FT in this article.


As this chart shows UK household debt has risen steadily over the last nine months to stand at 170% of disposable income with the US at 140% – well ahead of levels during the early 1990s recession.



The free lunch cannot last forever. But somebody I spoke to today at least might benefit from the free Mars he has wagered that crude will be back at $30/bbl over the next few months.