Influence of Oil Price on the Plastics Market

2014-12

 

Author:Kim Lin-Marketing Department   Date collection: Rita Rong– Marketing Department   Website: www.sunta.hk

Date:7Jan2015   Plastic Monthly(No.53)   Influence of Oil Price on the Plastics Market

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Table of Contents

Chapter 1:Plastic Market in December 2014 3

1.1International Oil Price (WTI)–Go downward. 3

1.2 Upstream monomers–Reach the bottom.. 5

1.3Plastic raw materials market–Depreciate slowly. 10

Chapter 2: Plastic Market Forecast in January 2015 14

2.1 Imports of ABS/GPPS/HIPS/PP. 14

2.2 Global economy–Advance slowly. 18

2.3Plastic market forecast 19

Chapter 3: Summary–Demand rests with Industry 21

Chapter 4:Appendix-Major Events 21

 

 

 

 

 

Chapter 1:Plastic Market in December 2014

1.1International Oil Price (WTI)–Go downward

Figure 1: International Oil Price(Oct-Dec 2014)

Source:NYMEX

Table 1：WTI fluctuation(Nov-Dec 2014)

	Nov 2014 average	Dec 2014 average	Dec Vs Nov 2014
WTI	USD76.42	USD 60.07	↓21.4%

 

In December, the average value of the international oil price was USD60.07, which has fell for almost 50% since the highest value in June. This was the largest reduction in the international oil price in a short run since the financial tsunami in 2008 as well. The major factors that led to such a rare continuous low in the crude oil are as follows:

 

• Politics would be the prior factor. When Putin first took on the president in 2000, he applied to join the Western Military Organization NATO, wishing to form an alliance with the west. Yet, anti-Russia was predominant in the US, they guarded against Putin. The NATO scheme was therefore unsuccessful, and remorse appeared in diplomacy between the two countries since then. Until Putin entered the second presidency in 2004, Russia began to become hostile to the US.

 

Russia’s economy relies on energy source export in major, with petroleum export accounts for 40%. Statistics showed Russia’s economy could increase powerfully when oil price was above USD75. In recent years, the oil prices are likely to stay high, which has greatly empowered Russia’s economy, and became more threatening towards the US virtually. Particularly, Russia was involved in the continuous geopolitical dispute in Ukraine in recent two years, Russia was uncompromising on this scope, a falling oil price would become a trend.

 

• The US currency raised the falling oil price. In this year, the US currency has risen for almost 12%. Since European and American petroleum futures were traded in US dollars, the US currency increased, investors were less interested in commodities futures valuated in US dollars. This has led to the detachment of hedge funds, the oil price then reduced.

 

• The imbalance between demand and supply has provided space for the reduction of the oil price. The international Organization of the Petroleum Exporting Countries, OPEC, has announced not to minimize production publicly in November last year. In 2014, petroleum production in Russia has created a new high in recent 20 years, the daily production of crude oil has reached 10580 thousand tubs. Petroleum export in Iraq greatly increased in December 2014, which was the highest since 1980.

 

Next to America, China and Japan is the second and third biggest petroleum consumption country respectively. There is a close relationship between economic figures and energy demand, the HSBC manufacturing industry PMI in China lingered around the entrepreneur confidence threshold in November and December. In Japan, the month-on-month GDP decreased 6.7% and 1.9% in the second and third quarter respectively. The poor economic figures in the two countries showed a sluggish economy at the end of 2014, which restricted the demand towards crude oil.

 

To conclude, the current crude oil market is being constrained by political and US currency factors. Besides, excess of supply is still a common trend, with the unseen of rising demand in the major crude oil import market in China and Japan recently, it has formed a difficulty in altering the poor price of crude oil in December.

 

 

 

1.2 Upstream monomers–Reach the bottom

Figure 2: Upstream monomers SM&C3(Oct-Dec2014)

Source: Chem99

Table 2：SM、C3 fluctuation(Nov-Dec 2014)

	Nov 2014 average	Dec 2014 average	Dec Vs Nov 2014
SM	USD 1266	USD 941	↓25.7%
C3	USD 1119	USD 724	↓35.3%

 

In mid-December, the price of Styrene (SM) has reached the bottom. The reduction for the entire month has reached 25.7%, which was higher than the sum of the reduction in previous two months, the average value greatly fell to USD941. Meanwhile, both upstream and downstream products of SM have fallen.

 

 

 

 

 

 

 

 

Figure 3: SM supply chain fluctuation（Dec 2014）

EPS↓28.8% HIPS↓11.9% GPPS↓12%

↓26%

↓14%

↓8.5%

↓25.7%

↓30%

• Benzene (BZ) and Ethene (C2) are the major raw materials to produce Styrene (SM), 0.79 tons BZ are consumed in producing every ton of SM, the proportion of BZ accounts for over 65% in the production cost of SM. In these months, both C2 and BZ had obvious fall, the reduction of C2 and BZ were 30% and 26% respectively in December. SM was reaching the bottom since prices of both upstream and downstream products fell.

 

• Polystyrene (PS) is an important derivative of SM. At present, the major consumption scope of the foaming PS refers to packaging materials, including buffering material of home electrical appliance, warm-keeping material of construction, one-time utensils, etc. The major consumption scopes of General Purpose Polystyrene (GPPS) and High Impact Polystyrene (HIPS) refer to electronics, electronic appliances, daily commodities and packaging materials. The traditional industry is at off season near to Lunar New Year, the reduction of demand has restricted consumption quantity of SM.

 

Overall, the price of SM has reached USD830 in December, it then went stable after fall. The trend of the entire month has fallen under the lack of support of cost and the restriction of demand.

 

 

 

 

Figure 4：C3 supply chain fluctuation（Dec 2014）

↓2.8%

↓8.8%

↓21.4%

原油

↓29.2%

丙烷

↓21.2%

↓8.5%

↓14%

↓3.2%

↓35.3%

Among the four major monomer raw materials, Propylene (C3) had the greatest reduction, which reached 35.3%. Taking a deep look at the upstream and downstream products of C3, there are several major factors:

 

• It was highly related with the movement of crude oil and Propane. In December, the accumulated reduction of the international oil price has reached 21.4%, the reduction of Propane was 29.2%, the reduction of crude oil price has led to collective fall in price of large amount of products.

 

• The buying quotation of Asia underwent depression. The buying price of C3 dropped greatly in Asia, namely prices of CFR Taiwan, CFR Southeast Asia and FOB Japan at the end of the month had fallen about USD300 compared with the beginning of the month, the reduction was about 30%,the quotations restricted each other, and therefore, the price of C3 dropped continuously.

 

• The downstream demand was low and weak. The downstream products of C3 were general, Polypropylene (PP),one of the products decreased 8.8%. The end user of the raw material of PP reinforced the falling tendency of quotation as expected, taking the wait-and-see attitude, their activeness towards purchasing C3 has dropped.

 

To conclude, supply of C3 was yet to be affect by overhaul in cracking plant in Decemberbecause the traditional overhaul peak season will be impacted by the depressing quotation of other downstream products in the coming first quarter. Overall, C3 has a decreasing trend.

 

Figure5：Upstream monomers AN、BD（Oct-Dec 2014）

 

Source: Chem99

化Table 3：AN、BD fluctuation(Nov-Dec 2014)

	Nov 2014 average	Dec 2014 average	Dec Vs Nov 2014
AN	USD 1926	USD 1864	↓3.2%
BD	USD 1033	USD 974	↓5.7%

 

Among the four major monomer raw materials, Acrylonitrile (AN)had the smallest reduction, which was 3.2%. Raw material C3 had great reduction while AN had the smallest fall.

 

• Trend of device. The AN device scheme of Taiwan Sinopec (240 thousand tons per year) has carried out overhaul for a week recently; the AN device scheme of Formosa Petrochemical Corporation (280 thousand tons per year) has carried out overhaul for four weeks recently; the AN no.2 device of Tong Suh (560 thousand tons per year) has carried out pull over overhaul. The rate of operation of some of the Asia cracking plants are around 90%. Although the above device overhaul has limited impact towards the supply of AN market, there is a difficulty to put it down.

 

• It is related with the reduction of downstream products. Acrylic fibers, ABS raw material and Styrene Butadiene Rubber (SBR) are the major downstream products of AN, the reduction of these three products were 2.8%, 8.5% and 14% respectively. Due to the weaker end demand, the three industries alleviated stress through limiting production and reducing burden, this brought the AN raw material sluggish.

 

       Overall, the average value of AN was USD1864 in December, the reduction was similar as the previous month, it went stable under the weak quotation of supply and demand.

 

Figure 6：BD supply chain fluctuation（Dec 2014）

 

↓25.7%

↓24.2%

↓14%

↓5.7%

Butadiene (BD) has experienced a quick falling period in October, it then went stable. It has decreased USD59 in December, the reduction was 5.7%.

 

• Stable production.The major source of BD refers to the by-productof splitting Ethene by Naphtha. Therefore, to increase the production of BD, unless there is a huge investment in Ethene device, with a technical condition of Naphtha splitting method, which there are only a few large petrochemical businesses contain such ability. Thus, the production of BD is relatively stable.

 

• Gentle demand. BD is the major raw material of producing synthetic rubber like Styrene Butadiene Rubber (SBD) and Butadiene Rubber (BR). At present, the annual production of tire in China accounts for 1/4 of the world’s annual production, which is the largest tire manufacturer and export country. Synthetic rubber has a low degree of self-sufficiency, it relatively relies on import. However, the European Union (EU) has implemented the legislation of green tire standards officially in November, which has restricted the development of tire industry in China in a certain extent, and transmitted towards the upstream of supply chain. Therefore, the demand towards BD could hardly rise in quantity in a short run.

 

To conclude, the production and demand of BD were gentle, the overall performance was stable and increased.

1.3Plastic raw materials market–Depreciate slowly

ABS

Figure 7：The Comparison of spot price and cost in an ABS market（Oct-Dec 2014）

         

Price variation at USD87

Price variation at USD132

         

Source: HK Traders

The cost of ABS in the graph is 0.6*SM (Styrene) +0.25*AN (Acrylonitrile) +0.15*BD (Butadiene) +US$300. It hasn’t included expenses like terminal handling charges.

Table 4：ABS fluctuation(Nov-Dec 2014)

	Nov 2014 average	Dec 2014 average	Dec Vs Nov 2014
ABS	USD 1795	USD1642	↓8.5%

 

The price of the ABS spots good market has followed the costs obviously. At the beginning of October, the price of the ABS spots good market was USD87 higher than the production cost, the variation between the two prices then became greater, the variation has reached USD132 at the end of December. Apart from the reduction of oil price monomer, attitude of chemical factory was also a factor leading to a falling price of ABS, it would obstruct the market direction in a large extent.

 

Formosa Petrochemical Corporation and Chi Mei Corporation have appeared different fall during opening quotation at the beginning of December, both factory prices were USD1700. Until the opening quotation at end of the month, Formosa quoted USD1550 while Chi Mei quoted USD1650. However, there was a detail in the market at that time, which was the reduction of oil price monomer still. Yet, both opening quotations of the two chemical factories were stable and increased at the end of the month, the attitude of “go against the trend” was due to:

 

• In the continuous market crash in these few months, the downstream demand stopped and order-taking in chemical factory reduced. Yet, in the non-planning overhaul period, although chemical factories kept working, manufacture based on number of orders has controlled the production quantity in a large extent. And due to the reduction of production quantity, the actual processing cost was higher than production in a large quantity as seen on the factory price.

 

• During the reduction of price of bulk commodities, the falling tendency of end clients has increased as expected, they mainly procured spot and separated goods based on production. Traders replenished the stocks cautiously in order to minimize the risk of overstock.

 

   In general, the factory prices of chemical factories were relatively unswerving at the end of the previous month, and thus, ABS had a trend of growth after reaching the bottom at that time; however, it still dropped USD153 compared with the previous month, the fall was 8.5%.

 

GPPS

 

Figure 8：The Comparison of spot price and cost in an GPPS market（Oct-Dec 2014）

 

Price overlap at USD1600

Price variation at USD164

Source: HK Traders

The cost of GPPS in the graph is SM (Styrene) +US$120. It hasn’t included expenses like terminal handling charges

Table 5： GPPS fluctuation(Nov-Dec2014)

	Nov 2014 average		Dec 2014 average	Dec Vs Nov 2014
GPPS	USD 1503	USD 1323		↓12%

 

The market price of GPPS was close to the production cost at the beginning of October, the variation between the two prices has reached USD164 at the end of December. The trend of the market price tended to go smooth and stable compared with the various times of “killing” fall of the production cost.

 

The market price has yet to follow the great fall of the production cost, limited supply was the key. Yet, supply and demand were exactly the two ends of a balance, they were used to poise each other, the performance was as follows:

 

• Daily household commodities, namely blender, desk lamp fittings and plastics knives and forks, required more production of GPPS. In the market crash in these few months, customers with stable orders have ordered the futures of December earlier. In December, customers purchased spot or separated goods based on production needs, this has less restricted on the trend of prices.

 

• Multiple pressures have made corporate development difficult in the CD/DVD tape industry. First, the quoted price was depressed by upstream customers. Second, labor cost and inflation still exist. Third, current consumers have a greater acceptance towards trendy electronic products rather than traditional CD/DVD entertaining equipment. Factories could hardly breakthrough the usage of GPPS regarding quantity.

 

Due to the above factors, under the circumstances of reduction of demand, the chemical factories would adapt to market changes and make modifications upon production by not only reducing the factory price, but also further cut the production quantity of GPPS. This could balance the original model and production quantity of GPPS, as well as the weaker demand, as a result, the market price would go smoother and more stable.

 

PP

 

Figure 9：The Comparison of spot price and cost in an HOMO PP market（Oct-Dec 2014）

 

Price variation at USD509

Price variation at USD362

Source: HK Traders

The cost of HOMO PP in the figure is calculated by C3 (Propylene) +US$120. It hasn’t included expenses like terminal handling charges.

 

Table 6：HOMO PP fluctuation(Nov-Dec 2014)

	Nov 2014 average	Dec 2014 average	Dec Vs Nov 2014
HOMO PP	USD 1514	USD1381	↓8.8%

 

The distance between the market price of PP and the production cost became greater gradually, the price variation has spread from USD362 at the beginning of October to USD509 at the end of December. The major reason of the reduction of production cost was the rapid fall of monomer C3, and the key of the smooth trend regarding market price was the support from supply restriction.

 

• The major chemical factories in Taiwan region have lowered the factor prices one after another, the market price has reduced. Due to the inactive market deals, traders became more cautious in replenishing stocks, chemical factories chose to produce less or even not to produce because of the difficult order-receiving, this has caused lack of order-taking in particular trademarks, and thus, no spot goods can be bought.

 

• Particular trademarks of PP in some of the Middle East regions or Korea places of production has appeared supply stoppage becauseit took a period of time or even a month from delivery to South China.

 

In general, the average value of PP was USD1381 in December, the market has maintained a “callback” trend, but the tense supply has led to a small descending range.

 

Chapter 2: Plastic Market Forecast in January 2015

2.1 Imports of ABS/GPPS/HIPS/PP

Figure 10：Import quantity in regions（Jan-Nov 2014）

Jan Feb Mar Apr   May Jun   Jul   Aug Sep   Oct   Nov

Source: the Customs

 

Figure 11：Import proportion in regions（Jan-Nov 2014）

Source: the Customs

  

In November 2014, the import quantity of plastic raw material in the South China region has reached 211857 tons, which took the first place, yet it has decreased 4.4% compared with October. In the East China region, the import quantity has fallen from a high position in October to 152067 tons in November, the reduction has reached 36.8%. In other regions, there was a little growth in import quantity, which was near to the level in the second quarter.

 

The import quantity in the South China region began to fall slowly since August, which implied that the traditional manufacturing industry was moving towards a low season, reducing the usage of plastic raw materials. The import quantity in the East Chin region maintained a growth from May to October, which indicated that the demand in the regional market was increasing, and the peak season of demand was in the third quarter. In the entire 2014, the import quantity of raw material in other regions was relatively stable, while that in the South China region was the largest.

Figure 12：Types and quantity of import raw materials in South China region

（Jan-Nov 2014）

 

Source: the Customs

In the South China region, PP was the major source of import raw materials, ABS was the next, the import quantities of GPPS and HIPS were relatively few. Although the import quantity of PP fell in November, it was still the first among the four major materials in the market share.

 

The import quantity of PP was mainly stable since July, which showed a reduction in market demand. The import quantity of ABS increased in the second and third quarters, the peak season of demand could become a strong support in a large extent. GPPS and HIPS were steady in the entire year, which reflected a gentle demand fluctuation, it is expected that no great changes will appear in the import quantity in December.

 

Figure 13：Fluctuations of import raw materials of traders and factories in South China region

（Jan-Nov 2014）

Source: the Customs

 

Figure 14：Types and quantity of import raw materials of traders and factories in South China region（Jan-Nov 2014）

Source: the Customs

In the South China region, the import quantity of raw material in factories were much higher than that in traders. The import quantity in factories increased in November, while that of traders began to fall since September, indicating that traders would reduce orders in the fourth quarter.

 

Among all import raw materials, PP took the leading position, the import quantity of PP in factories was about 295 thousand tons more than that in traders, ABS also outwent about 416 thousand tons. This showed that traders were being more cautious in taking orders, which put a hint foreshadowing the following tense spot goods.

 

Figure 15：Import proportions of customs in GuangDong（Jan-Nov 2014）

 

Source: the Customs

 

In the major customs in GuangDong, the import quantity in HuangPu customs was the largest, ShenZhen customs came next, GuangZhou customs was the following one, the import proportion was 38%, 31% and 15% respectively. This has reflected a concentrated industry in GuangZhou, ShenZhen and the surrounding regions in a certain extent, the demand of raw material quantity was large; while the proportions of ShanTou customs, GongBei customs and JiangMen customs were lower sequentially.

 

 

 

 

 

 

2.2 Global economy–Advance slowly

 

Figure 16：PMI of China, the US and Eurozone（Jan-Nov 2014）

Source: Xinhua 08

＊China Official PMI- Jointly published by China Federation of Logistics & Purchasing and the National Bureau of Statistics

＊America ISM PMI- Published by the US Institute for Supply Management

 

• The official PMI of China has decreased to 50.1 in December, which was the lowest level in eighteen months. This gave an emphasis on the challenges the manufacturing industry in China will encounter. The sluggish economic figures has increased burden on this second biggest economy in the globe. In order to stimulate economic growth and minimize the cost of loans, People’s Bank of China has implemented reduction of interest rates, this act was the first time in recent two years.

 

• The PMI of America was 55.5 in December, although there was a fall compared with November, this value was higher than those in all months in the upper-half year. Values in this entire year were all above 50 entrepreneur confidence threshold. The trend of oil price in the lower-half year will be eye-catching as the amount of crude oil imports has fell to a low position in recent five years. The amount of energy imports in the US dropped greatly, there was a trade deficit of 39 billion US dollar in November, which was the lowest value since December 2013, indicating that the US economy has appeared stable and revived.

 

• The integrated PMI of the Eurozone increased slightly from 51.1, the low point in the sixteen months, to 51.4. Although the PMI data of December was higher than the low point of November, and it was the eighteenth consecutive month above the entrepreneur confidence threshold, data of December implied that the growth rate would be about 0.1% in the fourth quarter in the Eurozone; overall, economy in the Eurozone has yet to meet decline in 2014.

 

2.3Plastic market forecast

ABS

With the coming Lunar New Year, most of the customers have completed the delivery one after another, yet, there are still highlight spots regarding demand of ABS in January:

 

• The traditional toy industry has begun the production of Easter orders, customers would possibly make up the required plastic raw materials for March’s production in January. Besides, factories would check inventory at the end of the year, which would restrict the quantity demand in a certain extent.

 

• The infant product industry has no obvious off and peak seasons, there is no Lunar New Year customs in western countries. Some customers have made the orders for February now as the gross margin of most of the infant products is relatively large. The industry does not contain a high price sensitivity towards the raw materials, some customers would stock up earlier base on profit margin.

 

• Kitchen utensils had price of plastic raw materials fallen continuously in the lower-half year due to the high price of ABS with high production costs during the upper-half year, there was a great reduction in January compared with the previous periods, some customers would therefore increase the quantity orders in January in order to balance the price variation.

 

In January, the ABS market could possibly become stable instead of fall when customers are concentrated in replenishing stocks. If oil price and monomers keep decreasing, the futures market price would possiblyincrease back slightly.

 

 

GPPS

Under the tie up of the falling back monomer SM, GPPS maintained a slight fall, this increased the atmosphere of downstream wait-and-see, plus, there will be New Year holiday, which would slow down the purchase action towards GPPS raw material.

 

The CD tape industry is a traditional GPPS material industry with no obvious off and peak seasons. Currently, some customers are hurrying in delivery before New Year, the production quantity would possibly increase in January. Besides, some customers may make inventories for products earlier with an aim to make up for the stagnating process during the New Year holiday.

 

In late-December, some factories concentrated in stocking up, after all, inventories require time, and it is a suitable time to take the orders for the lower-half year of 2015 in January. It is estimated that maintaining strategy of order-taking base on demand would be the majority, and focusing on the current spot goods, a relatively conservative quantity demand would form certain constraints towards the GPPS quotation.

 

PP

Due to the variation in delivery period of PP raw material, most of the customers tended to order forward goods. Domestic products adopt stable quantity of PP since most of the selling prices of domestic goods are relatively steady, the current price of plastic raw materials is low, and thus, the profit margin would increase if orders are made currently.

 

The DVD tape industry is now positioned at traditional peak season, which would concentrate in making delivery before Christmas and Lunar New Year. This industry is sensitive towards prices. In the market crash in December, customers indicated that manufacture the orders took in August and September now could maintain profits as the price of C3 was high, the price of transparent PP was around USD1800. Due to the high costs, the quoted price for upstream customers at that period was higher than now, yet, along with the great reduction of oil price monomer in recent months, the price of transparent PP has fallen to USD1540, and the upstream customers of the DVD tape industry has realized the reduction of costs, and therefore bring down the offer of the new orders for factories, which has restricted the quantity of order-taking in factories. Overall, the demand of the PP market would possibly become less due to the New Year holiday effect in January.

Chapter 3: Summary–Demand rests with Industry

Christmas orders were made in the traditional manufacturing industry, some of the industries are now busying with Easter orders.Demand rests with industry. In the previous year, demand was gentle, particularly customers who were in the phase of market crash observed, the essential materials were purchased in spot and separated formats. However, supply would become tenser when most of the factories arefocusing in resupplying spot or separated goods, it would easily form a turning point from falling to stable in the plastic market price.

 

Chapter 4:Appendix-Major Events

31 Dec 2014                          The United States Department of Commerce has confirmed of permitting more export applications of extra light crude oil. This was the first relaxation of the US crude oil export prohibitionin forty years. It is expected the daily quantity of extra light crude oil could increase to 1000 thousand tubs at the end of 2015.

 

 

27 Dec 2014                          A rocket brought a huge fire by making a hit to the oil storage tank in the largest export port, Es Sider, Libya. And the fire has spread over two other oil storage tanks. The flames of war has reduced the daily production of crude oil in the country to 352 thousand tubs, which was merely half of the daily production in November.

 

12 Dec 2014                          In November, the daily production of crude oil in OPEC was 30560 thousand tubs, which was 560 thousand tubs higher than the upper limit of the organization’s quota. This was the sixth consecutive month exceeding production. The three major oil-producing countries in the Persian Gulf have reduced the official price sequentially, the WIT broke USD60 per tub.

 

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