INSIGHT: China domestic PP prices may fall after hitting 46-month highs

SINGAPORE (ICIS)–China’s domestic spot polypropylene (PP) prices have surged to CNY 10,300/tonne for the first time since December 2014, after rising steadily over the past three weeks on the back of tight supply and stock building before the National Day holiday. But it is clear that prices may drop after October.

– Supply will increase after National Day holiday

– Demand continues to be languish

– Downstream factories suffer from squeezed margins

In the week ended 21 September, domestic PP flat yarn prices in east China were assessed at Chinese yuan (CNY) 10,050-10,550/tonne, up by CNY 325/tonne from the previous week, according to ICIS data.

Prices soared on temporarily tight supply and the stock building that is typical before a major holiday.

However, from the middle of October, supply is expected to improve as most plants on maintenance restart. Uninterrupted polymer production over the holiday period will drive up inventory levels.

“We will have pressure to move planned sales volume as workdays in October are only 18 days,” one trader dealing with PetroChina-produced PP said.

Effective domestic production growth for granular PP has been only 3.2% in 2018, compared with 10% in 2017, and is an important reason to explain why PP prices have been higher over the past nine months. Most new plant start-ups have been expected for the second half of 2018, including Yanchang Yan’an Energy’s PP plant with capacity of 250,000tonnes/year, which has been in commercial operation since early September.

Many market participants have a bearish outlook for the fourth quarter on  concerns over new start-ups.

“[The] price soaring ahead of [the] holiday is a spent bullet. It is only a matter of time before prices fall,” a trader in east China said.

2018 H2 PP new and expanded unit start-ups	Unit:’000 tonnes/year
Region	Company	Capacity	Upstream	expected time to start-up
South China	CNOOC Huizhou	400	Naphtha ethylene cracker	May,2018
Northwest China	Yanchang Yan’an Energy	250	CTO	September,2018
Northwest China	Huating Coal	200	CTP	H2,2018
North China	Haiwei	200	PDH	H2,2018
Northeast China	Hengli Petrochemical	440	Naphtha ethylene cracker	November,2018
East China	Zhong’an Lianhe Coal Industry	350	CTO	November,2018
Total		1,840
Source:ICIS

Source: ICIS

Moreover, import volumes have increased year on year since May as large-volume duty-exempted cargoes have flowed into China along with commercial production of Nghi Son Refinery and Petrochemical’s (NSRP) 400,000 tonne/year unit in Vietnam and Lotte Chemical Titan’s 200,000 tonne/year facility in Malaysia.

Apart from the above, S-Oil’s 400,000 tonne/year unit in South Korea has also been producing qualified material since early September.

In the week ended 21 September, import PP flat yarn prices in east China were assessed at $1,215-1,235/tonne, up by $15/tonne from the previous week, according to ICIS data.

The local price of imported material last week after the 6.5% duty, 16% value-added tax (VAT) and a CNY150/tonne port fee stood at CNY10,540/tonne, nearly the same as domestic PP flat yarn, the data showed.

In response, China’s PP import volumes are expected to remain at a higher level than last year.

While ample supply will put press on the market in future, PP demand has been under pressure in 2018 largely because of the cooling of the real estate industry.

January to August accumulated retail sales of air conditioners, for example, fell by 6.4%, washing machines by 14.7%, and refrigerators by 10.7% year on year.

“[The] Inventory of finished products is still high, [and the festival] couldn’t bring [the] traditional peak season this year,” one buyer from a downstream factory said.

The trade war between the US and China had been a major contributing factor to weaker demand.

The US will impose tariffs on $200bn worth of imports from China, many of which include plastics and petrochemicals. The tariffs came into effect on 24 September 2018, starting at 10%, and they will rise to 25% on 1 January 2019.

The volume of affected exported plastic products has increased to 1,760,000 tonnes and export orders will be lost to some companies.

The market outlook is dampened also by a squeeze on margins in the plastics sector.

From January to July 2018, the accumulative total business income of plastic products manufacturing enterprises was CNY 1,096.76bn, up 6.1% year on year, according to data from Ministry of Industry and Information Technology of the People’s Republic of China. But total profit was CNY 56.05 billion, down by 1.2 % year on year.

“We are struggling on the cost line this year, prices of BOPP [biaxially-oriented polypropylene] film sometimes couldn’t catch up increasing PP prices,” one buyer from a BOPP factory said.

By Dora Xue