The Edginess, The Nervousness Continues

By John Richardson

THE edgy and nervous nature of the recovery in Asian polyolefin markets became even more apparent from discussions the blog held with traders and producers during a visit to Singapore last week.

Such was the uncertainty that there were mid-week reports of falls in pricing.

By Friday, though, one producer told us he felt confident enough to raise his offer prices for August material.

This was reflected in the assessments made by ICIS pricing for the week ending 22 July. Polyethylene (PE) prices were assessed $20-40/tonne higher with polypropylene (PP) increasing by $30-50/tonne.

But interestingly, ICIS pricing wrote in its 22 July Asian PE report that the bulk of purchases made so far during this recovery have been by traders.

“China’s plastics processors are expected to start replenishing their stocks at the end of July, ahead of the peak manufacturing season due to begin in August,” continued the report.

As we have been reporting for the last three weeks, traders appear to have e-entered the market in fairly large numbers on the belief that prices by the week ending 8 July (when the recovery began) had bottomed out.

Drawing parallels can be a little risky, but a trader-inspired rally also occurred in copper around the same time, according to a report we read in the Financial Times.

Commonsense dictates that at some point end-user buying in polyolefins, and probably across a broad range of commodities, has to pick up. Regardless of the strength or weakness of Western economies, there is still going to be a peak manufacturing season for making finished goods for exports to the US and Europe in time for Christmas.

Further adding to the confidence of polyolefin traders is the expectation that supply will be tighter in August and September on turnarounds at Asian crackers.

And as we discussed last week, mechanical problems at two Saudi polypropylene (PP) facilities have reportedly taken an annualised 1.1m tonne of supply out of the market.

Several grades of PE are also pretty tight, according to one of the traders we spoke to.

But we are not able to walk around all the bonded warehouses in eastern and southern China in order to assess stock levels (now isn’t that a wonderful idea?).

In other words, we, and everybody else trying to figure out this market, cannot gauge exactly how much material all the traders have bought in anticipation of increased purchases by end-users.

Adding to the nervousness and edginess of this three-week long rebound is an equal lack of certainty over the strength of the eventual upsurge in buying by the plastic processors.

“Most converters in China are small and medium-sized enterprises,” a very senior source from a major polyolefin producer told us last week, underlining what we had already understood.

He also agreed with us that until or unless Beijing gets inflation below 4%, the SMEs could well continue to struggle to afford and source credit.

“Some of the end-users I know are being forced to pay interest rates as high as 15% from finance companies outside the official banking system,” he added (the official lending rate is only 6.56%).

“There are rumours that measures will be introduced to help the SMEs get more finance at reasonable rates, but the question will then be whether the measures will work.

“If the extra lending ends up in the hand of the speculators, this would obviously not help the smaller companies and could add to inflationary pressures.’

His view was that sales volumes would likely remain lower than 2010 levels for the rest of this year.

One further factor that must surely be hanging over the markets is the possibility that the US will fail to raise its debt ceiling by the 2 August deadline.

If the worst outcome occurs will the peak manufacturing season even happen?

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