Is the rally in Asian polyethylene markets fizzling out?

The rally in Asia’s PE markets has started to fizzle out after robust buying pushed up prices since the beginning of the year. This can be attributed to the decision by the Chinese Central Bank to raise reserve requirements along with softening crude oil and naphtha feedstock costs, dampened buying interest in China, with some buyers expressing hopes that prices would retreat from their early week highs to more workable levels, as per Chemorbis. 2010 began on a strong note for Asian PE, with prices across the region surging on the strength of limited supplies, higher upstream costs and a wave of speculative buying in China. This seems to have come to a halt. Producers, however, have so far shown little willingness to agree to discounts on their offers as spot ethylene costs have jumped by nearly US$150/ton in Asia over the past week or so, leaving many PE producers offering below their theoretical production costs even at their current price levels. As the week draws to its close, most players are watching the movements of the ethylene feedstock market in order to get a clearer idea of the market direction. Few market players had, at the end of last week, expressed doubts that the rally in the PE market could maintain the rapid pace of increases seen last week, with predictions of a mostly steady trend for the current week. This sentiment gained further strength this week when the Chinese Central Bank unexpectedly increased the reserve requirements of member banks by 0.5 percentage points, the first increase in reserve requirements since the government shifted to a loose monetary policy in December 2008. In the wake of this decision, buying interest from China began to slacken as the market interpreted this decision as signaling the beginning of tighter credit policies by China’ monetary authorities. Another factor contributing to the softness in market sentiment is weakening energy prices, with crude oil dropping below US$80/barrel for the first time in 2010 on Wednesday at $79.65/barrel, while spot naphtha prices in Asia sunk from an inter-week high of US$771/ton CFR Japan to US$735/ton with the same terms on Wednesday, with Wednesday’s spot numbers being the lowest recorded since January 4. In addition, the approach of the Chinese New Year holidays is expected to exert downward pressure on the market as buyers will become increasingly wary of purchasing while sellers will look to sell off their excess inventories ahead of year-end bookkeeping. Although these factors would seem to indicate a strong likelihood of softer prices, sellers have found support from surging ethylene feedstock costs, which have shot up by US$145/ton since the start of the year to be reported at around US$1300/ton CFR Northeast Asia this week. Traders attributed the rise in spot ethylene prices to tight supply in the region, although trading activity is said to have slowed over the past few days as developments in the crude oil market and in China’s economic policies have begun to be taken into account. With the theoretical cost of producing PE standing at around US$1450/ton CFR Northeast Asia based on current spot ethylene prices, a number of PE producers report that they are considering cutting their run rates soon as prevailing LLDPE and HDPE spot prices are well below the theoretical break-even point.