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Challenges for chemicals trading in Q4

Aromatics, China, Polyolefins, Singapore
By John Richardson on 01-Oct-2009

The views of two Singapore-based chemicals traders explain some of the fundamental shifts in production, logistics and demand since the economic crisis began.

“I have done reasonable business this year and made quite good returns, but volumes are way down,” said the first of these two traders, who deals in toluene and mixed xylenes (MX).

“Cracker-based aromatics producers are being exceptionally cautious and are very unwilling to risk building inventory.

“Whereas I used to get, say, 5,000 tonnes a month from a particular company it’s a maximum of 2,000-3,000 tonnes and sometimes none at all.”

Reformer-based output in China has been heavily influenced by liberalisation of government restictions of fuel prices, he added.

This has led to sudden and sharp increases in output that markets have, at times, found hard to absorb.

“Aromatics pricing has recovered, of course, It’s been either firm or rising for most of the last eight months, ” he continued.

“But the end-user demand hasn’t really responded in the same way. All we’ve really seen is some re-stocking, the cost-push from higher crude and a lot of speculation by Chinese traders.

“Weaker volumes are making it really hard for the shippers.

“There’s a lack of small vessels of below 5,000 and up to 10,000 tonne in capacity. A lot of the ones out there are close to being scrapped because they are old.

“A customer in China, say, might only want less than 5,000 tonne but it’s not economic to ship such a small cargo from Southeast Asia to China.

“So even if I can find a supplier it can be difficult to find a ship, despite a big surplus of tonnage.

“A lot of new vessels are being delivered which will keep freight rates down for some time. These are either medium-sized ships at 20,000 tonnes or large vessels between 60,000-80,000 tonnes.”

He was worried about recent price corrections and believed that “a lot of unsold inventory in China has yet to work its way into the market.”

But the trader was confident that crude would remain at $65-70 a barrel for the rest of the year.

“I don’t see a problem with storage,” he said, disagreeing with the forecast of $45 a barrel.

“The crude price will obviously set a floor for toluene and MX.

“Even if everything goes into free-fall the crude traders are likely to come in and buy-up surplus aromatics.

“This happened last year when they set a floor for toluene and MX at about $400/tonne.

“I think the floor will be higher this time because crude will remain relatively stable.”

The second trader – this time in polyolefins – agreed that oil would stay at $65-70 a barrel for the rest of this year.

“But we are facing a lot of indigestion. China has imported a huge amount of polyethylene (PE) and polypropylene (PP).

“Since September the market has been very quiet. This always happens after a strong buying spree.

“The Dalian Commodity Exchange futures contract in linear-low density PE (LLDPE) has collapsed.

“This is a sign of weak overall sentiment. Traders have also suffered heavy losses and so they have less cash to spend in the physical markets.”

Volume and pricing on the exchange have fallen very steeply as this chart from Paul Hodges shows:



September volume was down by 63% from April.

“What we have to wait for is end-November when pricing (in the physical markets) should pick up as manufacturing increases ahead of the next Chinese New Year (February 2010),” the second trader added. 

“If it doesn’t this is a sign of some big supply imbalances.”

But even if there was a brief rally at the end of November, he predicted that afterwards there would be a prolonged trough on new capacities and a fall in Chinese bank lending.