By John Richardson
The mood on the proverbial factory floor can be very different to that in buoyant stock and other commodity markets as the impact of the economic crisis lingers, with the chor-alkali to vinyls industry in China just one an example of a real industry that is still struggling.
“From the perspective of some of the chlora-alkali producers, this feels like a recovery that is almost entirely index-driven,” says Lynn Du, of CBI – the Shanghai-based commodity information service.
“Liquid caustic soda prices were $650/tonne back in 2008 with ECU (electro-chemical unit) costs $330-350/tonne, which was exceptionally competitive, adds Du.
“Many alumina projects have since been put on hold in Australia, Brazil and elsewhere (Australia, Brazil and the US are the three biggest export markets for Chinese caustic). Liquid caustic prices have fallen to $220-230/tonne.”
Overall economic confidence notwithstanding, therefore, the local industry looks set to undergo a great deal more pain. The smaller players and those on the coast where electricity costs tend to be higher look particularly vulnerable.
A further problem when you get down to the polyvinyl chloride (PVC) end of the chain is the increased pricing volatility resulting from last year’s launch of a futures contract in PVC on the Dalian Commodity Exchange.
“Prices now fluctuate by Rmb600/tonne in the space of just a few weeks. Before the contract was launched it would take several months for pricing to move by this much,” adds Du.
Volume traded on Dalian each month is often around 10% of the physical demand – roughly 1m tonnes a month.
Unlike the linear-low density polyethylene (LLDPE) contract on Dalian, most of the PVC business ends up in physical delivery.
So once a PVC contract for a particular month expires, futures speculators might want to offload cargoes or decide to hold.
Nobody is therefore certain of exactly how much is going to hit the real market until it actually arrives.