By John Richardson
CHINA’S domestic linear-low density polyethylene (LLDPE) prices have rebounded by as much as Yuan 1,000/tonne ($147.5./tonne) or 8% over the last two weeks, according to this ICIS news article from my colleague Rainy Ma.
As these graphs show (click below) there is now a significant gap between more expensive domestic material and cheaper imports.
This has led to a rise in imports as traders place the cheaper overseas material into storage in order re-sell in to the Dalian Commodity Exchange’s LLDPE futures contract.
The price spike in the physical market has come at the same time as prices have also risen on Dalian, with the increases on the exchange apparently driven by higher crude.
An important question in these circumstances (This has happened before: A rise in the Dalian last November/December attracted a surge in imports) is to what degree the local physical market is being influenced by Dalian and vice-versa.
I suspect the physical market is being Dalian-driven because all the indications are of a poor H2 on weaker demand and increased supply.
Import prices for all grades of PE also edged-up last Friday, according to assessments by my colleagues at ICIS pricing. For example, high-density PE (HDPE) increased by $10/tonne to $1060-1110/tonne CFR China.
The justification for higher import prices was that domestic inventories had been depleted – and that the peak buying season was just around the corner. August is when China’s manufacturing industry ramps-up to meet demand from the West for goods for Christmas.
But there is clearly a need to separate the imports that have gone into storage to speculate on the Dalian and those that have been delivered to converters to meet real demand – in order to get to the bottom of the real reason for higher import prices.
The hopes of a strong peak buying season seem a little forlorn, given slowing growth in the US and also in China.
In addition, the market is going to take considerably more time to absorb increase Chinese and Middle East production.
So while any price recovery has to be welcomed following a couple of months of declines, this rebound looks as it might well be driven by the traders after a quick buck from Dalian.
The exchange is therefore – as we’ve mentioned before – making the market more opaque.
“It used to be that we had two markets in Asia – China and the rest of Asia, but now we have three – Dalian, China and the rest of Asia, which is causing a lot of confusion,” a source with a global polyolefin producer told the blog.
“What I am really worried about is the 100,000 tonnes of LLDPE that is in Dalian warehouses right now, which has to be delivered into the physical market when the September contract closes.
“If activity on the Dalian remains strong beyond the September contract then that’s fine, but if not and people start bailing-out, there could be a lot of negative pressure from this 100,000 tonnes.”