India polymers slide once again

By Malini Hariharan

The messenger’s prediction has turned out to be correct. Indian polymer producers have been forced to reduce domestic prices to match levels seen in the wider Asian market.

The week started with a downward revision to polypropylene (PP) prices followed by cuts in prices of low density polyethylene (LDPE), linear low density polyethylene (LLDPE) and also polyvinyl chloride (PVC). LDPE and PP faced the highest price reduction of around $80/tonne.

But will these price revisions be sufficient to revive markets?

Producers are confident that high prices seen earlier this year has not resulted in demand destruction and buying will return once sentiment improves.

However, negative cues from the global market means that the sentiment is unlikely to change.

Crude oil has softened in the last few days and so has naphtha. More importantly, the Chinese polymer market is still weak and prices are expected to fall further.

As mentioned on the blog earlier, a combination of factors including the government’s credit tightening measures and power shortages have severely affected demand and speculative activity. Earlier this week, the People’s Bank of China raised the bank reserve requirements by 50 basis points, its sixth upward revision this year, as consumer price inflation in May hit a 34-month high of 5.5%.

India too is battling inflation and the central bank raised interest rates yesterday, the tenth time since the start of 2010.

In the midst of this pessimistic macro economic news, producers are hoping that the third quarter will offer some respite once the peak production season starts in China and scheduled plant shutdowns in Asia tightens supply.

But restricted credit availability, power issues and rising labour costs could well dampen this year’s production season resulting in weaker demand for polymers.

What happens next is partly in the hands of producers. Will they be willing to cut operating rates?

“We are heading to a crucial point now,” says a trader who believes that production cuts at naphtha-based producers are long overdue. The sharp fall in PP prices in the last few weeks should force some producers to make the move.

His prediction is that prices will bottom out in June and there should be some stability in July unless there are major swings in crude oil and naphtha prices.

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