Will crude oil revive PE markets?

By Malini Hariharan

Has the steady increase in crude oil prices last week prompted Chinese buyers to resume purchases? That is what a Shanghai-based distributor of Middle East product is hoping. And it is the only explanation that he can find for concluding a sale of nearly 10,000 tonnes of polyethylene (PE) yesterday.

After weeks of carrying stocks at his three warehouses in the country the trader was pleasantly surprised to transact this business. Buyers are probably looking at crude and thinking that it is the right time to buy, he said.

But whether this will continue is uncertain especially as crude oil prices slipped yesterday after the US reported an increase in inventories.

The trader is finding it extremely difficult to decipher the Chinese PE market. He is quite sure that the massive volumes imported in 2009 have not been digested. Some amount has probably been re-exported but quite a lot is still in the hands of speculators who flocked to the market following a huge increase in bank lending last year.

Like almost all participants in the Chinese market he also has interesting anecdotes to tell.

“A young man, probably in his twenties, approached me last year wanting to buy 300,000 tonnes of PE. It turned out that he knew nothing about the business. But he had access to money thanks to his father who was an important government official with the right connections. And he believed that investing in polymers would give a good return.

“There are many like him. I do not sell to speculators but I have found that they still get hold of my product. I discovered how only after I received a quality complaint from a company that I had not heard of. I traced the flow of material using the lot number and I found that end-users have sold to speculators, sometimes even at a discount. They did this as they were paid immediately which kept their cash flow positive,” he explained.

He is convinced that speculators will eventually exit the market causing a huge price correction. But this will happen only when banks demand repayment of the loans made last year.

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