From cautious optimism, to rising anxiety, the mood surrounding China's polyolefins market in H2-2010 is downright pessimistic, due to a lethal cocktail of stronger output in China and the Middle East amid weak demand in China, as per ICIS.
"It is going to take a few months to clear up polyolefin inventories and volumes from new plants," Mazlan Razak, Kuala Lumpur-based consultant with DeWitt & Co said recently. "We are looking at probably sometime in the second half of 2011. "Asia will have to rationalise production in August. Integrated crackers are still doing OK in terms of margins. But even if operating rates are cut to 85-90% you still have bigger Middle East volumes to contend with. The market is fundamentally weak and directionally it is not looking good." "Polyolefin markets in China are very soft with producers having no choice but to push material at whatever price," added a source with a major South Korean producer. "So far there have been no rate cuts in Asia, but at end-July/August it is possible that marginal producers will cut operations." July-August was normally a hot season for the manufacture of household goods in China, he added - reflecting a widespread hope that demand might be about to pick-up to help consume extreme overstocking in polyethylene (PE). "So far we haven't seen positive signals. In automobiles in China, inventories are 45-60 days, which is not much. But customers in the construction sector have high stocks of pipes as a result of a slowdown in the real estate sector. If this continues, the government may remove controls to boost the construction sector."
Naphtha-based northeast Asian (NEA) ethylene margins are averaging US$209/ton for the third quarter on 16 July, compared with US$378/ton in Q2 and US$474/ton in Q1. Part of the decline is the result of increased ethylene availability in Southeast Asia -the result of the start-up of the Shell Chemicals cracker in Singapore, which is in C2s surplus.
Another factor has been increased spot sales from the Middle East due to production problems at one plant and commissioning of a new cracker ahead of associated downstream start-ups. Middle East shipments have also risen due to PE rates being cut in the region due to poor demand in China.
2009 was an exceptional year in China because of what Paul Hodges, UK-based chemicals consultants with International e-Chem, called the "desperation of the giant stimulus package". This brought forward growth from future years, and created the unsustainable inflationary pressures that have led to tighter lending conditions in general, including those affecting property. Staggering demand-growth numbers for polyolefins in 2009 could have largely been down to this temporary economic boost, re-stocking and the decline in the use of recycled materials.