Crisis of confidence

By Malini Hariharan

Asian polyolefins (PO) producers are seeing no signs of an immediate recovery in demand and pricing as buyers in the key China market continue to remain on the sidelines.

There are just too many negative factors, says one producer referring to concerns about the economic health of Europe, the Chinese government’s efforts to control asset bubbles, volatile crude oil and additional supplies from new plants in the Middle East and China.

This is probably the reason why prices in the physical market did not increase despite an improvement in linear-low density polyethylene (lldPE) futures on the Dalian Commodity Exchange.

A second producer does not expect Chinese demand to pick up for the next couple of months. “The controls on real estate mean that the construction sector will be weak. We are also hearing that car companies are holding very high inventories of more than 1m cars; they do not want to produce more. And while the film sector is not too bad, the agricultural film season is over,” he explains.

Chinese exporters of finished products are reported to be seeing delays in shipments as European buyers have asked for deliveries to be spread out over a long period.

And another worrying trend, says a market participant, is that Chinese buyers at the second level of polymer distribution chain are backing out of contracts. That is contributing to the pessimism, he adds.

Asian producers are also anticipating higher export volumes from the US where domestic polyethylene (PE) prices are continuing to fall.

US producers have reduced June offers by 4cents/lb, reports ICIS news. And buyers are gunning for further reductions.

“I expect more, maybe a couple of cents,” a US buyer said. “Our demand isn’t slow. I think they [producers] just built up inventory while pretending they were short.”

A question that is being increasingly asked is whether Asian producers will start cutting operating rates to prop up markets.

But as can be seen in this chart, from ICIS pricing, margins for Asian naphtha crackers have fallen sharply in June but are still fairly comfortable at around $200/tonne.


“The second half of 2010 could get more dicey especially if the new Middle East capacities for ethylene and PE flood the market. Margins will then start to deteriorate. In 2001, Asian cracker margins were not even $100/tonne. We are not there yet but the potential of getting there is very real,” says Larry Tan, ICIS pricing’s director of data & analytics in Asia.

But in the midst of all the pessimism certain segments such as lldPE hexene and lldPE octane are doing well. Producers’ inventories are still at manageable levels. And there is confidence that Chinese demand for local consumption will remain strong, although exports, despite the jump in China’s May numbers, is a matter of concern.

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