….In A Tale Of Three Markets.
By John Richardson
AS China introduces more measures to clamp down on an overheated property sector and the shadow-banking system, polyethylene (PE) traders regard this latest news cycle as yet another opportunity to go short.
“It used to be that the trading business was about supply and demand fundamentals of PE itself, but not anymore,” said a Singapore-based trader.
“For the last four years, ever since the Dalian Commodity Exchange was launched, we just look at the macro-economic news and make a decision on whether to go long, short or sit on our hands on the futures market.
“To some extent the futures market effects daily trading volumes on the physical market.
“I am sure there will be some good news just around the corner that will lift sentiment temporarily.”
But fundamentally, however, the trader admitted that he is “flabbergasted” as to how weak demand is post-Chinese New Year in the non-speculative world, where people have to buy resin to actually make things.
We are well into the second week of trading post-New Year and yet, according to the trader, converters remain exceptionally cautious.
“I expected that much more restocking would have taken place by now. The processors are sitting on reasonably low inventories, but are in no hurry to enter the market which suggests their orders must be weak.
“The traders are also reluctant to stock-up and as for the producers, they are also sitting on low inventories. As a result, they are able to stick to attempts to raise prices {because of very weak margins, we think], but they are having very limited success.”
Increased supply could soon weaken the position of producers.
But it is not all doom and gloom for those producers selling into the higher-value segment of the market. They remain confident.
“For the high-end film manufacturers in China, into applications such as high moisture-barrier film for food, they have absolutely no problem in accessing financing from the state-owned banks,” said a source with a PE producer.
“Plus, the big brand-name finished goods manufacturers that are state-owned are instructed to buy from these converters.
“I think a reason is that these higher-value film producers are exactly what the Chinese government wants to encourage: An industry that is move up the value chain as part of China’s efforts to escape the middle-income trap.
“These higher-value producers are also highly automated and so are not as affected by higher labour costs and labour shortages.”
“But the higher-value segment only comprises 10% of the overall China PE market. The commodity end of the business is struggling in, for example, lower-value applications of high-density PE (HDPE).
“The consolidation process amongst lower-value converters is already played out in the US and Germany, but is still taking place in China.”
Fascinating stuff, but this is all a little nuanced for those in commodity and equity markets who continue to argue that the current rising tide will lift all boats.
We continue to think that as we move into the second quarter, their arguments will become increasingly ineffectual.