By John Richardson
THE above chart is a useful reminder of the role that crude prices has played in influencing the pricing of polyethylene (PE) and polypropylene (PP) in Asia since January of last year (I have picked just two grades of PE and PP, but the story is similar across the other grades).
You can see how up until August 2014, the world was an easy, predictable place. Oil was moving in a narrow band close to $100 a barrel and the lack of volatility was reflected all the way downstream to the PE and PP markets.
But then the “Black Swan” arrived, which, of course wasn’t a Black Swan at all: The Collapse in oil prices from August 2014 onwards.
Up until very recently, we saw a sharp retreat in PE and PP pricing. This was the result of China’s plastic converters buying “hand-to-mouth” in response to the fall in the oil price.
Two other factors greatly added to the caution of converters: A slowing local economy and rising domestic PE and PP self-sufficiency that reduced the demand for imports (the prices quoted above are for imported material).
Then came February 2015 and a new-found stability in crude. This has given converters the confidence to come back into the market in the belief that oil had found a “New Normal” price level for 2015 – in the case of Brent, around $60-70 a barrel.
Some of the converters are now also more willing to stock-up because Lunar New Year holidays are over and their factories have resumed production.
This has led to a recovery in PE and PP pricing. For instance HDPE film pricing has increased from $1,125/tonne CFR China for the week ending 23 January to $1,213/tonne CFR China on 6 March.
There are PE and PP market-specific reasons that have also supported the rally, which include:
- Turnarounds at six crackers and refineries in South Korea between March and June that have already driven-up ethylene and propylene prices.
- Maintenance work during March at one, possibly two, PP plants in the Middle East.
- Reports of PE supply shortages in the Middle East and in India.
But you must ask yourself what has changed since this PE and PP price rally began.
We know for one thing that China’s economy is still slowing down – and economic conditions will get worse before they get better.
We also know that China’s PE production in January was 9% higher year-on-year. For the full-year 2014 domestic output was 10% higher at 12.9 million tonnes over 2013. You can see the same pattern in PP.
So the main thing that has changed seems to be the oil price.
And we know that there is a growing body of evidence suggests that crude prices, barring geopolitics, might retreat in Q2. New evidence that has emerged over the last few days includes.
- Among industrialised nations, commercial oil and petroleum-product stockpiles could hit an all-time high of 2.83 billion barrels by midyear, the International Energy Agency warned last month. The last time they were at that level, in August 1998, oil prices averaged $13.38 a barrel, equivalent to $19.18 a barrel in today’s money.
- Breaking this down by region, European commercial crude storage could be more than 90% full, and inventories in South Korea, South Africa and Japan could be at more than 80% of capacity, according to Citigroup. US crude-oil supplies are at their highest level in more than 80 years, according to data from the US Energy Information Administration, equal to nearly 70% of the nation’s storage capacity.
We are also in a deflationary world where for the next few years, the negative impact of weaker oil prices will be greater than the benefits. So the demand side of the crude equation looks set to get worse before it gets better.
As I keep saying, please, please be very careful out there.