Market Reports

The high cost continues to rise, Plastic market steadily upsurges

2013-07

Table of contents

Plastic Market in July. 2

Plastic Market Forecast in August. 6

The market – A steady upsurge. 6

Europe—PMI back on the dividing line. 6

The USA—A steady economic growth. 7

Statistics of client imports—A seasonal rise. 7

Client inquiry quantity—Remains stable. 8

Prospects——A stable price with supply tightening up. 9

Appendix - Major Events. 10

Plastic Market in July

Figure 1: The price charts of SM, C3 &WTI (Jan 2010 – Jul 2013)

Source: Chem99

In July 2013, the International Oil Price generally rose. In the price movement of 3 years, July’s price once again surpassed US$100 / barrel, with the highest at US$108.5 / barrel. (Figure 1)

Special events like the strike in Libya reduced the oil production by one-third. At the same time, Egypt was having a political instability. Although Egypt is not a major oil producing countries, the 3 million barrels of oil in the Persian Gulf region everyday were shipped via the Suez Canal, which passes through Egypt, to the western market. If the Suez Canal is blocked, there will immediately be a shortage of oil supply.

With an increasing oil price, being a monomer material which is the by-product of oil, the rise of Styrene (SM) followed is the most significant.

Figure 1 shows that Styrene and oil price has a correlated trend. From July 2012, the increase in the price of Styrene became larger. A larger degree of increase is observed after one year, which can be analyzed as follows:

1. The ban on using Expandable styrene granulate (EPS) in China was lifted due to its superb and persistent thermal insulation, unique shock resistance and water repellency. It has been holding a high opinion in the construction field. This lift of ban eliminates the obstacles to using EPS in the field of building insulation.
2. The 450,000-tonnes production equipment at Shell, a major SM factory in the Netherlands broke down and suspended production without a warning.
3. The operation of the furnace at Lotte in Korea postponed, which had once pushed the price difference between SM and its raw materials Benzene by more than US$500.

In terms of supply, at the end of July, the inventory of SM in the eastern China was only 33,000 tonnes, while the market stock control should be 100,000 tonnes. A demand gap exists as chemical plants normally purchased and stored the monomers to be used in August and September in July, which increased the internal price quote of SM in the country by RMB 200 / ton. The mainstream price quote in eastern and northern China also rose to RMB 13,800 / ton, reaching a yearly high.

The supply of Propylene (C3) is also affected by overhauls. BASF and some Propylene cracking plants in Malaysia have arranged overhauls in July earlier. Also, the operation of some AA (Acrylic acid) was about to begin. The polymers of Acrylic acid are used in synthetic resins, synthetic fibers, superabsorbent, building materials, paints, etc. Also, the market demand gradually increased, which increased the demand for C3.

In the entire July, C3 has reached a 15-month high. The price of Acrylonitrile (AN) rebounded gradually, which will be described with graphs below.

Figure 2: The spot price quote of an ABS market & the price charts of AN & BD (Jan 2010 – Jul 2013)

Source: Chem99

The price of Acrylonitrile is generally stable this year. AN reached a 3-year low in the middle of last year when we look back. The price later rose slowly under the measures of production reduction of some chemical plants. As of July 2013, the stable AN rose slightly at the end of the month, which gradually widened its price difference with the drifting apart Butadiene (BD).

Butadiene has reached a high price of around US$ 4,000 / ton in 2011. After 2 years, its current price is at the lowest in around 4 years. Its situation differs materially from Styrene, which makes record-high constantly. It is also a rare scenario in the plastic industry.

The falling Butadiene would easily hit the demand for synthetic rubber. In July, there has been constant news regarding reducing utilization rate in synthetic rubber plants. Kumho Petrochemical in Korea lowered the utilization rate of its synthetic rubber (RB), which produces 340,000 tonnes per year, to 50%. TSRC in Taiwan also lowered the rate of its 100,000-tonnes machinery per year to 80-90%.

The chain reaction caused by a falling demand for synthetic rubber reduced the BD production of some cracking plants. At the same time, the low price of BD has narrowed the price difference between ABS and GPPS, which will be explained with Figure 3 below.

Figure 3: The comparison of spot price and cost in a GPPS, an ABS & a HOMO PP market (Jan 2012 – Jul 2013)

Source: HK Traders

By looking at the trend of the past 18 months, ABS went up steadily in July 2013. For the time being, there was a gap between the US spot market price and its cost. Later, the fluctuations in the level of the International Oil Price and the price monomer raw materials cancelled each other out. The ex-factory price of chemical plants did not increase substantially. Also, the mainland market was also mostly cautious. Under the premises of a limited stock and lacking in a lowering space, market price gradually rose.

As the oil price remained at around US$ 100 and a rising upstream monomer Styrene, various chemical plants raised their ex-factory price in view of the support of high cost. In addition, other raw materials industries pushed monomer prices higher. Also, as the profit margin of SM is higher,some chemical plants shifted to sell SM monomer, resulting in a reduced supply of GPPS, a possible increase in itsprice and started to show a trend that its price will no longer follow that of HOMO PP.

Currently, there are not many brands of HOMO PP in the market. The PP in the Middle East was mostly shipped to the mainland via mainland ports, which did not affect Hong Kong much. In July 2013, most PP chemical plants in Taiwan produced after receiving orders. This limited production would increase the cost easily. Therefore, raising the ex-factory price is also a way of survival for chemical plants by balancing profits and costs. Also, as distributors purchased little, the limited stock maintains the price stability of PP in July in general.

Summary of July

Table 1: The average and percentage change of WTI、SM、C3、AN、BD、ABS、GPPS&HOMO PP (Jun – Jul 2013)

The oil price increased in July. Being a by-product of oil, the price of upstream monomers also rose. However, with other factors setting in, the price of some monomers fell.

As there are both ups and downs in the price of upstream monomers, differences in demand and shipments, the plastic raw materials market is quite vivid. For details, please refer to the retrospective analysis.

Plastic Market Forecast in August

The market – A steady upsurge

The direction of the plastic raw materials market will still depend on the degree of rising demand to a certain extent. The degree of demand is generally reflected on the number of orders received by clients. Because of this, we will analyze the economy of the export markets, i.e. Europe and the US firstly.

Europe—PMI back on the dividing line

The economy of Europe and the US can be evaluated with the Purchasing Managers Index (PMI), one of the economic indicators. The PMI of Europe in July rose to 50.4, the first time surpassing the watershed at 50 since July 2012. Economic activities in July resumed a moderate expansion for the first time since early 2012. This is the clearest sign of recovery of the Eurozone from economic recession up-to-date. Also, the economic sentiment index of the Eurozone in July rose for the third month consecutively, reaching a 15-month high.

The USA—A steady economic growth

The PMI of the US rose to 53.2 in July, reaching a 4-month high, indicating an expanding US economy and manufacturing activities. Also, the US Federal Reserve continued with its current monetary easing policy to stimulate the economy due to the tightened Federal budget and weak overseas growth.

Judging by the PMI preliminarily, the economic prospects of Europe and the US are still optimistic. In the long run, it would benefit the exports of Chinese enterprises. However, the actual orders received by enterprises will differ according to the types, classes and actual situations of products. In order to increase its objectivity, we can also use the quantity of production materials to determine its productivity. One of the approaches is to refer to the statistics of client imports in Table 2.

Statistics of client imports—A seasonal rise

Table 2: The import volume and seasonal percentage change of ABS, GPPS & PP of Guangdong (Jan – Jun 2013)

In regards to the situation of clients’ imports, the volume of ABS, GPPS and PP in the 2^nd quarter has increased to different extents comparing with those in the 1^st quarter.

Client inquiry quantity—Remains stable

Figure 4: The bar chart of client inquiry quantity (Jan – Jul 2013)

Source: Market Statistics Department, Sunta

Table 3: The percentage change of client inquiry quantity (Jan – Jul 2013)

Referring to the inquiry quantity of the company in the past 7 months, it is reflected that the demand of clients rose in the 2^nd quarter. The increase in July was larger than that of last month as well.

The maintenance of inquiry quantity among clients reflects that the productivity of most enterprises is kept to a certain degree. Together with the good manufacturing index in Europe and the US and increase in the import volume of raw materials, it is indicated that the demand of the manufacturing industry is still normal during the traditional peak season.

Prospects——A stable price with supply tightening up

In August, some industries will adjust its practice of staging orders accordingly in this transitional season. For example, some electrical appliance industries will produce fan heaters in summer and fans in winter. This adjustment according to the actual production plan can balance the functioning of profits and costs and make respective inventory arrangements according to the price trend of the raw materials of plastics.

On the price trend of raw materials of plastics, if we look at the International Oil Price first, we can see it is getting more and more influenced by the increasing energy consumption in China. China is now the world's second largest oil consuming country and one of the countries with fastest growing oil demand. China's oil demand growth is thus most crucial to the ups and downs of International Oil Price. Under the prerequisite of economic growth, the use of oil will accelerate. The oil price could possibly float around US$105.

Referring to Figure 3 above, it is noted that the prices of ABS and GPPS were close to each other. However, as at the end of July, BD has already rebounded and supported the price of ABS. As the price of SM stood still and there were news on cracking plants suspending production, it is not likely to witness a substantial fall in the price. It is very likely to float around US$ 30 – 50.

As there is no timely demand meeting, the chemical plants made a conservative asking price but still used the quantity supplied to maintain price stability. Also, facing a higher price, traders purchase a small volume, making the market supply persistently tight. Placing orders becomes the major style of purchasing. Generally speaking, it is likely to observe a slow increase in the price of ABS. As for GPPS, as the cost of its monomers is high and the production volume in chemical plants is limited, the stock in market is becoming scarcer and scarcer. There is still room for increasing.

In addition, there is still HOMO PP. The majority of the medical product industry at present consumes PP material most with a stable demand. As there is a small variety in the current PP market, the price of PP could remain high. Also, the majority of Taiwanese goods are manufactured after an order is placed. The control of production volume can thus determine the price to a certain extent. With a limited supply, the stably priced PP might rise.

Conclusion

So far this year, the persistent increase in the exchange rate and the rising raw material price since May, the mainland manufacturing industry could not but raise the selling price due to the rising cost. Buyers placed fewer orders and constituted a belief among plastics traders that there is no room of profit due to a high selling price of chemical plants. Instead, most of the traders hold a conservative and cautious attitude to reduce orders and number of stocks. This might lead to a tightened stock of some brands. Also, with uncontrollable factors like the typhoon season, there might be delays in shipment. Clients are advised to increase the percentage of inventory if possible to avoid loss due to delays in production.

Appendix - Major Events

3 July 2013                          The oil production in Libya was reduced by one-third. The oil refineries in the US would increase the heavy oil processing capacity from Canada, which relieved the oil storage in Cushing region and made the oil price rise to a 9-month high.

17 July 2013                         Butadiene fell below US$ 815 / ton due to excess supply, reaching a 4-year low.

19 July 2013                        The stock market of the US made reached historical highs constantly, which uplifted the oil futures market. The geopolitical tension in the Middle East persists. The International Oil Price rose to a 16-month high at US$ 108.04 / barrel.

23 July 2013                        The 450,000-tonnes production equipment at Shell, a major SM factory in the Netherlands broke down and suspended production. Also, the inventory of SM in the eastern China fell drastically to a weekly inventory of 43,000 / ton, while the market stock control should be 100,000 tonnes. Styrene reached a record high to US$1,800 / ton.

～The End～

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