Polyolefin producers doing RMB business in China were delighted when price increases on the Dalian Commodity Exchange linear-low density polyethylene (LLDPE) futures contract started leading the physical market on the way up.
“We used the exchange to justify charging higher prices for real deals because in the heady days of February-early August the general trend was up or at least stable.
“The trouble is that prices on the exchange have become more volatile in both directions. Physical trading is also slowing down on what I think are high distributor and trader inventory levels.
“The few buyers who remain interested are picking days when Dalian is on a downtrend in order to ask for discounts.
“It’s too early to call this as the correction we’ve been all been waiting for since April.
“This will become clearer after the long Chinese holidays which take place from 1-8 October.
“At the moment it’s hard to decide whether the drop in sales is down to a traditional pre-holiday lull or something much deeper.”
August volumes on Dalian were down 58% from their peak so far this year, which was in April.
According to Paul Hodges, who prepared this chart for his Chemicals & Economy blog last week, this indicated that the smart money was flowing out of Dalian and commodity and equity exchanges in general.
His view is that equities, commodites and the real-estate and auto sectors in China have risen way out of line with the underlying demand we keep referring to. As a result, he believes we are heading for a sharp correction.
The polyolefin producer understandably hopes he is wrong but concedes that first-half imports into China, and overall demand, were “highly deceptive” because of the temporary boost from domestic production cutbacks and speculative inventory building.
But still, he added: “I went to China two weeks ago and the mood was bearish because of a decline in Dalian. I came back the next week and the mood was bullish and now it’s bearish again!” (he was speaking on Monday this week).
“It’s all been driven by sentiment and speculation and by Dalian because nobody has a clue about the fundamentals.
“The big question now is that if the stock market declines continue and liquidity tightens up further, will Dalian volumes go into a long-term decline?
“Less volume might mean has relevance, but with markets so opaque even a market with very low volumes might remain valuable.”
His big fear is that buyers will get the most value out of Dalian in future, using it as a big stick to beat their suppliers.
What goes round comes round…..