China PE, PP Weakness Set To Continue

Europe and China: A two-tier market is hard to bear…

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By John Richardson

CHINA’S polyolefin pricing is likely to remain under downward pressure over the next few months as a result of a persistent inventory overhang, new supply and weak construction and auto markets, two traders and one producer have told the blog.

And as we reported earlier this month, falling US PE prices are raising concerns over very competitively-priced imports from the States.

The weakness in the Chinese market is in contrast to Europe, where tight supply is keeping prices firm and is attracting imports.

A further negative factor in China might be a stronger Yuan, which could encourage price-cutting by local suppliers, the producer said.

But so far this week the local currency has both weakened and strengthened against the US dollar following the weekend announceement that it would be allowed to trade in a wider daily band across the US dollar.

One argument is that the government’s decision was designed to engineer more volatility in order to discourage currency speculation and not a stronger Yuan.

Reports that the Yuan will definitely strengthen therefore seem premature.

“The polyolefins inventory overhang is still the result of the surge in bookings from overseas in late November and early December,” said the first of the two traders we spoke to, who is based in Guangzhou, Guangdong, China.

“We are also seeing the affects of new supply, in both China and the Middle East.

“A symptom of the downward pricing pressure has been the recent re-export of Iranian material.

“As was the case when the re-export market opened-up on the last occasion, we are not talking about big volumes and the size of the total trade has been exaggerated. However, the shipments are hurting sentiment.”

The second trader, who is based in Hong Kong, concurred and added: “There is going to be no relief on stock levels from local construction and auto markets that have slowed down considerably.

“Construction is being affected by all the government measures to cool the property sector, whereas tighter credit conditions are hurting autos.

“Auto manufacturers are telling us that they also have high inventories as a result of vehicles manufactured earlier this year on the assumption that extremely strong growth levels would be maintained.

“I am hearing that tighter credit is reducing private purchases, with many of the entire 2010 fleet orders by government companies brought forward in to Q1 because they anticipated that credit would be reduced.”

A source with a major Western producer agreed with both traders and added: “I am concerned that we might have seen the best of Chinese demand for imports for this year in the first half.

“China’s new plants are running reasonably well and we are seeing stabilisation of production at some recently started-up Middle East facilities.

“The positive news, though, is that OPEC oil quotas continue to limit production at established Middle East plants and we are definitely going to see more delayed start-ups.”

The weekend announcement over the Yuan led to sharp fluctuations in its value in both directions on Monday-Wednesday.

“It is early days yet, but if the Yuan was to show consistent greater strength this is likely to create a further negative for pricing,” added the first trader.

“Greater local currency strength would give buyers more ability to buy overseas material – i.e. they would need fewer Yuan to buy dollar-priced imports.

“The priority right now at Sinopec is to maximise the off-take from newly-commissioned local plants.

“So watch out for active centralised downward-management of pricing, plus more aggressive discounting by individual producers, in order to gain market share.

“A forward indicator of this would be reliable reports of rising Sinopec inventories following a sustained period of Yuan strength.”

A stronger Yuan would also weaken the competitiveness of local finished good exporters, such as the auto makers, thereby providing a further motive for Sinopec to manage polyolefin pricing to the benefit the local industry.

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