Polyethylene And Alice In Wonderland


alice_lg.jpgSource of picture: the-office.com



By John Richardson

A FURTHER illustration of the Alice in Wonderland world of financial investors versus the fundamentals of real demand was provided by the Dalian Commodity Exchange earlier this week.

“Some investment funds started snapping up linear low density PE (LLDPE) futures in anticipation of improvement in the Chinese property market and hence plastics demand,” said Canfeng Zheng, an analyst with Shanghai Chaos Investment in this article on ICIS news.

This theory was spuriously based on a 37.2% increase in real-estate investments during the first seven months of this year, but that was then and this is now.

The Chinese government has taken firm measures to cool the sector down and so to extrapolate from these historic numbers the idea that the sector will continue to expand at previous rates seems bizarre in the extreme.

But, of course, our friends in the financial world only seek to convince enough people for long enough of something being true (these are the poor gullible suckers left as the losing counter-parties in deals) in order to make their money.

From a polyolefins industry perspective as we first pointed out last year on this blog, LLDPE in China has to a significant extent become just another financial instrument. There is also quite a lot of evidence to indicate that the Dalian futures contract serves as a barometer for physical polyolefin markets as a whole.

On at least two occasions, the LLDPE contract has mislead the real market, leading to an overbuilding of inventory – once in late November/early December 2009 and in March of this year.

On this occasion, though, a wide buy-sell gap and a fall in import volumes to a trickle – according to this other report from ICIS news – seems to indicate that the fundamentals are just too bearish for the Dalian to be exerting a baleful influence. As we wrote yesterday, the recovery in PE is built on a house of cards.

But as my fellow blogger Paul Hodges points out, the far bigger threat from our friends in the financial community comes in the form of the underlying commodity we all have to worry about, above probably anything else: Crude oil.

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