Crude, Equities & Polyolefin Pricing

This is a huge subject, one that this blog will need to keep revisiting – and if you tell us we’ve got it wrong, we’ll always listen and respond.

For what it’s worth, the article below might give you some food for thought.

The influence of crude we are talking about below is different from that of converters responding to short-term movements in crude by stocking up on resin or running down inventories – which has long been their practice. This is purely a hedging strategy that can result in either gains or losses.

Whether the converters move the price of resin by increasing or cutting back on purchases depends on all the other influences on supply and demand.

This article refers to links between crude and equities that have nothing at all to do with the underlying fundamentals of polyolefin markets.

The other crucial difference is that the increasing influence of financial speculation – through exchanges such as Dalian – could, more-often-than-not, be actually moving the price of resin ahead of any actual changes in buying patterns; in short, unrepresentative changes in crude and equities could be leading polyolefin markets.

It’s always been argued that there are too many types and too many grades of chemicals and polymers for them to be exchange-traded in the same ways as oil and other commodities.

Are we seeing the start of a major shift, or is this a ridiculous stretch?



Source of graph: International eChem



By John Richardson

Volatility in China’s polyolefin prices has greatly increased in 2009 as a result of closer links with short-term  changes in crude oil and equity prices, said market observes and participants.

This is obscuring real levels of demand and making the planning process even harder, they added.

Linear-low density polyethylene (LLDPE) futures prices on the Dalian Commodity Exchange have closed tracked the shifts in the cost of crude oil since July 2008 – when the contract took off, said Paul Hodges of the UK-based chemicals consultancy, International e-Chem (see graph).

“Daily or even weekly fluctuations in crude don’t necessarily reflect a change in the fundamentals of any chemical or polymer market,” he added.

“What matters, of course, is supply and demand in a particular market and effect of crude prices on feedstock costs when you buy your raw materials.”

But Hodges believes that a growing army of speculators are moving LLDPE prices on the exchange in line changes in crude as they try to make money out of daily price volatility.

China’s huge increase in bank lending has made speculation in all sorts of commodities a lot during easier during 2009, he added.

“Although volumes on the Dalian Exchange have gone down a lot recently (they peaked at 85m tonnes in April of this year), it is still a great guide to sentiment in the overall physical polyolefin markets in China,” said a Shanghai-based source with a major Asian polyolefin producer.

“The market is so hard to read at the moment that Dalian has become as good a guide as any. Nobody is actually pricing off the exchange, but it’s helping us assess the mood.

“The Dalian exchange is shifting on a daily basis in line with equities.” (equities often follow, lead or move in tandem with shifts in oil prices).

When the Dubai World debt crisis erupted in late November leading to global dips in equity markets the LLDPE futures contract also fell, he added.

On the Thursday and Friday of that same week very few buyers in China were prepared to commit to any polyolefin purchases, said Shanghai-based commodity information service CBI.

LyondellBasell’s chief operating officer, Ed Dineen, also recently said that China’s physical-market PE prices were being increasingly driven by crude.

Polyolefin pricing had become much more volatilie in 2009, making sales and marketing strategies very hard to plan, said a Singapore-based source with a second Asian polyolefin player.

“The maximum visibility I can hope for these days is 2-3 weeks out, and so to describe this as a sales and marketing strategy would be a stretch,” he added.

“Estimating levels of real demand has become much harder these days because poylolefin pricing is moving in line with equities – which move often on pure sentiment.”

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