By John Richardson
THERE is a lingering, and, I think, potentially damaging belief out there that this is just a particularly bad oil-driven destocking process and that very soon, China’s buyers will pretty much flood back into the polyethylene (PE) market.
In emails and telephone calls this week, most of the market participants I spoke to are convinced that this will happen in January.
The logic still rests on the following:
- Inventory levels amongst converters in China must be low by enough, given that they have been buying on a “hand-to-mouth” basis since early September.
- And stocks in China’s bonded warehouses – where imported material is stored before it is distributed locally – are said to be low.
- Restocking always happens in January ahead of the Lunar New Year. Next year the Lunar New Year falls on 16 February, quite a lot later than 2014’s holiday season, which was centred on 31 January. Thus, there is the potential for a longer restocking season next year, before businesses start winding down ahead of the festive break.
“Even if oil prices don’t bottom-out in January, inventories are low and so our customers will have to come back into the market,” said a source with one global PE producer.
But I am worried that a new global financial crisis has begun. Commodity markets do not follow familiar patterns when everyone is panicking.
Specifically for PE, you also have to look at the data on China’s imports and domestic production.
PE imports rose by about 8% in January-October 2014 on a year-on year basis, according to China’s customs data. This represented an increase to approximately 7.6m tonnes from around 7m tonnes.
Local PE production was approximately 10% higher for January-October, according to ICIS China. This involved an increase from around 9.6m tonnes of output to approximately 10.6m tonnes. Much of this extra local production has been the result of the start-up of new coal-based facilities.
This tells us that there might still be some “indigestion” of PE stocks somewhere in China’s very extended, complex distribution system – far beyond just the bonded warehouses. Is some of this indigestion still connected with collateral trade?
Problems created by increased production in China also look as if they are about to be compounded by the start-up of a new big new complex in the Middle East.
Material from Borouge 3 is expected to start arriving in Asian markets in general in bigger quantities in Q1 next year. The Abu Dhabi-located Borouge 3’s PE capacities comprise 1.08m tonnes/year of high-density PE and linear-low density PE and a 350,000 tonnes/year low-density PE plant.
This extra supply means that converters in China will have plenty of product to choose from, as they worry about the new global financial crisis and a further deceleration of the Chinese economy as Beijing’s economic reforms continue. As a result, they could well continue with their “hand-to-mouth” buying policies.
When you are drawing up your business plans for Q1 you must therefore make provisions for the strong possibility that there will be no restocking season in China in January.
And last, but far from being least, is the issue of margins.
The chart at the beginning of this post once again shows ICIS pricing assessments from 25 July until 12 December. 25 July was the last complete trading week that month – and it was in late July that Asian petrochemicals markets in general turned bearish. 12 December is the end of the latest ICIS pricing week of assessments.
As you can, PE pricing has not fallen, percentage-wise, by as much as upstream naphtha and ethylene prices.
Prepare for the risk that this “lag effect” will wear off as spreads between ethylene and PE contract. This could, of course, negatively affect margins.