China Remains Weak On Government Tightening

By John Richardson

CHINA’S polyethylene (PE) market – a reasonable proxy we often use for the chemicals and polymer industries as a whole – remains worryingly weak, according to several traders and producers interviewed by the blog this week.

Modest restocking did take place last week, leading to a very slight improvement in sentiment and an edging up in pricing, but as one trader told us: “All this probably amounted to was end-users hedging against further hikes in raw-material costs.”

But while import prices might have edged up for some grades, domestic prices remained flat or declined.

A Southeast Asian end-user asked us the question, after looking at the cost pressures from crude upwards and the rally in polyolefins prior to the current lull: “Could this be a repeat of 2008?”

We think quite possibly, yes. On a wider basis this is a concern we have raised before.

The rally in crude, now driven by a supply (Libya etc) rather than a demand story, as was the case last year when it all about a booming China, could cause significant macroeconomic damage. Our advice to the end-user was to be very cautious over trying to hedge raw material costs by stocking-up on resin.

“We continue to see quite significant re-exports from China because PE inventories remain pretty high,” added the trader.

A producer concurred and pointed out that the underlying cause of the current lull in the market is different from that which occurred in Q2 last year.

Click here for a pricing graph – PEpricingMarch42011.ppt

At that time speculative imports of resin, resulting from lax lending conditions, resulted in a steep fall in pricing as traders off-loaded their high stocks.

This time around there seems to be a genuine slowdown in demand taking place as a result of government measures aimed at taking the heat out of the economy. My fellow blogger Paul Hodges points to the fall in the Baltic Dry Goods Index and a recent OECD report as indicating this slowdown.

“End-users remain short of credit because of the new restrictions on lending. It is very quiet out there,” a second trader told us.

On this occasion, unlike in Q2 last year, pricing has yet to fall off a shelf.

The reasons include an extensive cracker turnaround season which is restricting supply. This includes a nine-week turnaround that was begun at the ExxonMobil complex in Singapore earlier this week.

Another factor is the obvious cost-push from higher naphtha.

We made the point a couple of weeks ago that crackers mainly exist to convert ethylene into PE and that therefore co-product credits (strong propylene, benzene and butadiene) could only support margins for a limited period.

The March 4 ICIS Weekly PE Margin Report for Asia supported this view.

“Integrated PE margins in northeast Asia nosedived this week by around $155/tonne on a 7.0% rise in naphtha feedstock cost,” wrote my colleagues.

“Naphtha prices are the strongest since August 2008. Co-product credits rose by 3.2% on firmer butadiene and propylene prices; polymer prices were unchanged.

“Integrated low-density PE (LDPE) margins are the lowest since July 2010 and integrated high-density PE (HDPE) margins are in negative territory and are the lowest this decade.”

Standalone margins, however edged up slightly as ethylene prices declined.

The Ras Laffan cracker in Qatar was reported to be again exporting C2s after resolving technical problems. This might have been a factor behind weaker ethylene.

More ethylene could be on the way from the Middle East if the decision first by Saudi Arabia – and now apparently by other OPEC members – to increase crude output results in more associated gas feedstock.

Alternatively, the ethylene could be converted into more resin and/or monoethylene glycol (MEG).

Higher-cost producers in Asia might have to respond with production cutbacks that could well include extended turnaround periods.

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