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China’s Polyolefins Recovery On Shaky Ground

China, Economics, Oil & Gas, Olefins, Polyolefins
By John Richardson on 16-Mar-2015


By John Richardson

CHINA’S polyolefins markets were in a muddle last week as a result of resilient offer prices for imported material versus a fall in pricing for domestic cargoes.

Domestic polyethylene (PE) prices were largely softer, but local distributors were unwilling to significantly cut their offer prices for imported because of tight supply across Asia and the Middle East, reported ICIS in its pricing assessment for the week ending 13 March.

The reduced PE supply is the result of both scheduled turnarounds in South Korea and the Middle East and some unexpected production losses. These unexpected problems include last week’s declaration of force majeure by Qatar Petrochemical Co (QAPCO) for  its 200,000 tonnes/year No 2 low density PE plant at Mesaieed in Qatar.

Meanwhile, “a perfect storm” was taking place in feedstock ethylene prices, which matters most of all for the few Asian PE producers who are dependent on purchased ethylene.  Again, both planned and unplanned output drove prices  C2 higher – along with a closed West-East arbitrage window.

In polypropylene (PP), supply across Asia was again viewed as tight. This resulted in China’s import priced edging up, despite a decline in local pricing.

In an important contrast to ethylene, though, northeast Asia propylene prices actually fell because of the fall in China’s domestic PP pricing.

So what’s going on?

Despite the tight supply, market confidence was dented by China’s quite shockingly bad macro-economic news for January-February. Government data, which was released last week, showed steep declines in industrial production, producer prices, employment and housing sales etc.

And, of course, the fall in oil prices was the other big drag on polyolefins markets.  West Texas Intermediate fell by 9.6% during last week, closing on Friday at $44.84 a barrel on Friday. Brent  was at $54.67 a barrel on Friday– an 8.6% decline over the week.

Where do we go from here?

“I don’t deny that the Chinese economy is facing downward pressure and multiple risks,” said Li Keqiang, China’s prime minister, in a speech that was televised nationwide on Sunday.

“The pain of reform is still there, actually the pain is becoming more acute and in more places,” he added.

“During the course of reform, vested interests will be tested – but this is not nail clipping, this is like cutting off one’s limb with a sword and we have to do it despite the pain,” said Li.

This once again underlines that the government is not changing course, and so the economy will get worse – possibly a lot worse – before it gets better.

And on crude oil:

  • US oil production growth is as strong as ever, despite the reduction in drilling activity. This is because whilst the number of rigs in operation in the US is down by 40% since last October, the wells that are still in operation have become much more efficient.
  • Last week, US crude oil production rose by 42,000 barrels per day compared to the previous week, reaching 9.37 million barrels per day. This was up by nearly 1.2 million barrels per day from the same week in 2014. Last week was not a fluke, either. The four-week average posted a similar year-over-year rise.

High cost producers in the US and elsewhere may keep production high for a long time yet for debt servicing reasons. Then you have the social and political motives that will likely make governments insist that state-owned oil companies maximise rather than minimise crude production.

In a further sign that the false calm that characterised oil markets during February could be over, WTI was down another 2% last night to around $43.90 a barrel, the lowest price for WTI in six years.

And coming back to the subject of China, it is the end of China’s “wealth effect” that will remain the single-biggest drag on oil demand over the next few years.