China Quiet Market Persists

By John Richardson

LACK of credit and inflation are becoming even greater problems in China, which is reflected in polyolefin markets that remain very quiet indeed.

“It is ice cold out there with very little activity. Importers are waiting and hoping for some kind of improvement,” a Singapore-based polyolefin trader told the blog today.

A source with a major producer agreed and added: “Lack of credit continues to be problem for the small -and medium-sized companies (SMEs) due to the increases in bank-reserve requirements.

“Many of the converters, who are SMEs, are struggling to get sufficient working capital to operate at full capacity.

“The other problem, if you can call it a problem, is that the speculators in eastern China are not able to open letters of credit to gamble in the market.

“This is affecting activity in both the physical market and the Dalian Commodity Exchange, pointing to the fact that some of the strong volume growth we saw last year was the result of the ease of speculation.”

Cost pressures are another problem, resulting from an official inflation rate in China which is hovering around 5%.

“The packaging film, agricultural film and home appliance sectors are unable to pass on any further resin prices increases. This is part of the reason why polyethylene (PE) pricing has remained basically flat since the end of the Chinese New Year holidays,” the producer added.

Crude oil is one obvious cause of the inflationary problem afflicting the whole of Asia, along with rising food costs.

The cost of food is, of course, tied to some extent to that of oil. But rising food prices are also the result of changing lifestyles as more and more Asians tuck into a diet containing much higher amounts of protein.

Wage costs are also on the up in China, the result of official action to reduce social unrest caused by a widening gap between the rich and the poor.

A further trigger for inflation is the huge stimulus programme launched in late 2008, resulting in the rapid and dangerous rise in asset prices, most notably in the property sector.

The stimulus package has contributed to the widening of the gap between the rich and the poor (the rich have got richer thanks to surging asset prices and the ability to speculate in everything from condos to plastic resin due to easy lending conditions).

And so ironically, a short term impact of the government being forced to raise wages is more inflationary pressure as it attempts to reduce inflation through higher interest rates and bank reserve requirements.

The effect on polyolefins had been “a climate of exceptional uncertainty” added the Singapore-based trader.

“This has resulted in lack of buying activity in both PE and polypropylene (PP).”

But strangely enough while PE pricing has, as we have said, been pretty much flat since the CNY, PP has fared slightly better.

Click here for a chart showing PE pricing since January 2011 –


PP pricing, however, has risen steadily since January even if buying right now is exceptionally thin. For example, PP flat yarn prices had risen from $1,480/tonne CFR Main Port China on 7 January to $1,640 tonne on 25 March, according to ICIS pricing.

“It is all about supply. Supply is pretty tight in high-density PE (HDPE) and linear-low density (LLDPE), but not quite as tight as in PP,” said the trader.

He attributed current tightness in PP to turnarounds in the Middle East and lost production in Japan (30% of PP production was down late last week because of the earthquake and tsunami, again according to ICIS pricing. However, more than 50% of LLDPE capacity was also off line, suggesting that both polymers will be imported very shortly).

The blog suspects that an additional longer-term reason for tight PP supply is the structural shortage of propylene. This is due to the switch to lighter feeds in the US and continued strong demand growth for PP.

Ethylene and propylene prices both went up last week, but PE remained flat while PP edged up. This appears to support the argument that the polymers are in different supply positions.

The big question, the crucial question, is whether the economic problems in China will last throughout the year.

This could change the fairly optimistic mood evident during this week’s National Petrochemical and Refiners Association (NPRA) in San Antonia, Texas.

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