Turbulent Q1-11 for Asia’s polyolefin markets on fluctuating feedstock costs, uncertain demand

Asia’s polyolefin markets are likely to remain turbulent in Q1-2011 despite recent price hikes, as feedstock costs are fluctuating and future demand remains uncertain, as per ICIS. Producers are also concerned about the rapid rise in crude oil and naphtha prices, which have put margins under pressure. However, polyethylene (PE) and polypropylene (PP) prices rose by US$10-50/ton last week in China, as traders returned to the market after the New Year holidays. High-density polyethylene (HDPE) film-grade prices were higher at US$1230-1280/ton CFR (cost & freight) China, linear low-density PE (LLDPE) was at around US$1330-1380/ton CFR China, low-density PE (LDPE) was at US$1680-1740/ton CFR China, Polypropylene (PP) injection-moulding grade prices gained by US$10-20/ton to close at US$1460-1500/ton CFR China last week. An optimistic trader feels that current fundamentals in China are looking strong. Since supply of certain grades is tight and buying is happening, price hikes in January are expected. Demand from converters exporting plastic products to the West, is said to be good in expectation of a recovery in orders from USA and Europe. The year 2011 has had a better start than 2010. The recent surge in buying can be attributed to developments in the Dalian Commodity Exchange (DCE), where the key LLDPE futures contract for May hit yuan (CNY) 12,800/ton (US$1931/ton). This opened an arbitrage window, prompting traders to actively book import cargoes for arrival in February and March, while covering these transactions on the futures market. However, some market players are not confident that surge in buying by traders would compensate for a traditional slowdown in demand from end-users during the Chinese Lunar New Year holidays in early February. The Chinese government’s decision in late December to raise interest rates by 25 basis points would eventually dampen the speculative activity. This is coupled with resistance to price hikes building up among plastic processors in other parts of Asia. Additionally, cheap offers from the Middle East, especially Iran, would undermine efforts of producers to raise prices. The biggest concern is the run up in crude oil and naphtha prices and its impact on margins. Crude oil prices are above US$90/bbl, and naphtha values are at US$876-879/ton CFR Japan. Prices were predicted to remain firm for at least the next two months as supply was set to tighten on the back of refinery turnarounds in the Middle East. There was virtually no delta between ethylene and HDPE prices last week, as ethylene was trading at around US$1200/ton CFR Northeast Asia. Despite the hike in costs, most integrated producers across Asia were maintaining their normal operating rates as the squeeze in HDPE margins was being compensated by healthy profits from other ethylene derivatives such as LDPE and monoethylene glycol (MEG), according to market players.