Market Reports

Back to Buyer’s Market

2012-03

Table of Contents

Back to Buyer’s Market 2

International Oil Price – Adjustment in High Price Level 5

Upstream Monomers – Remained at High Price Level 6

Summary in March – The Plastic Market Back to The Buyer’sMarket 7

Forecast in April – Be Cautious for Rebound. 8

International Oil Price – Adjustment in High Price Level 8

Upstream Monomers – Mild Correction. 9

Market Outlook in April 9

Suggestions. 11

Appendix 1 – Major Plastic Events. 11

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PS

Table 1: PS spot price fluctuation（March, 2012）

Figure 1: A chemical plant GPPS spot market price, production cost and ex-factory price (January-March 2012)

Data from: Hong Kong traders

GPPS production cost calculated by SM (Styrene FOB Korea) +USD150, without terminal handling charges。

In early March, the production cost of PS continued the upward trend. This resulted in the increase in ex-factory price and spot market price of PS. The weak market demand limited the scale of increase for the spot market price.

The production cost has decreased since middle of March. The ex-factory price was stabilized. The spot supply was not much. The spot price was stabilized as well. With the correction of production cost, the gap between the production cost and the market price was narrowed down. But as the production cost remained higher than the market price, there was still cost pressure for the chemical plant.

ABS

Table 2: ABS spot price fluctuation（March,2012）

Figure 2: A chemical plant ABS spot market price, production cost and ex-factory price (January-March 2012)

Data from: Hong Kong traders

ABS production cost was calculated based on 06*SM (Styrene) + 0.25*AN (Acrylonitrile) + 0.15*BD (Butadiene) +USD$300 (conversion cost), without

terminal handing charges.

In early March, the price of ABS was corrected downward after reaching the recent high. On average, the price in March was still a little bit higher than the price in February.

As the production cost remained high, the chemical plants continued to increase the ex-factory price. But as the downstream demand remained weak, some traders lowered the selling price due to poor sales turnover. Their intention to buy from chemical plants was low. As a consequence, some chemical plants had their inventory built-up.

In order to reduce the inventory pressure, some chemical plants offered discount to the distributors, although the official quotation remained relatively high. The market price was decreased as a result.

PP

Table 3: PP spot price fluctuation（March,2012）

Figure 3: A chemical plant PP spot market price, production cost and ex-factory price (January-March 2012)

Data from: Hong Kong trader  

HOMO PPproduction cost was calculated based onC3(propylene)+USD$150 (conversion cost), withoutTHC..

Except for the price of Homo PP which increased a little bit, all polypropylenes including Block COPP (polypropylene copolymer) and PP-R (polypropylene random copolymer) showed different degree of price reduction.

As the downstream demand remained weak, the market price of PP continued to show mild correction. As the upstream monomer propylene increased in price, the production cost of PP was increased, which limited the decrease in market price of PP.

In such downward trend, traders tended to keep relatively small spot inventory.

International Oil Price – Adjustment in High Price Level

Fig 4：WTI（January-March 2012）

Table 4：WTI  fluctuation（March, 2012）

Compared with February, the international oil price showed mild correction in March. The volatility was small, with average price of USD106.44/barrel.

The nuclear incident in Iran drove the international oil price trend in March. As there was no further increase in tension between US and Iran, the oil price lost the upward momentum.

On the other hand, the sanction by US and Europe on the cruel oil export of Iran remained in force. EU would tighten the sanction of cruel oil export of Iran on 1^st of July. US also imposed the financial measures to strengthen the effect of sanction and to warn the major Iran cruel oil importers, including China and India, to reduce the import from Iran.

The international oil price remained at high level with the influence of such event.

Upstream Monomers – Remained at High Price Level

Fig 5：Monomer Price （January-March 2012）

Table 5：SM C3 AN BD fluctuation（March, 2012）

The price trends of upstream monomers differed from each other, depended on their own supply and demand situation. But overall, the price of upstream monomers remained at relatively high level due to the support of high international oil price and tight supply.

Styrene monomer (SM): With the maintenance work by various refinery plants in Asia, the supply of SM was limited. The price was pushed up to USD1500/ton. But as the downstream demand remained weak, the consumption rate of SM was lowered than expected. There was increasing inventory in East China region. Therefore, the price of SM started correction since middle of March.

Propylene (C3): The growth in downstream demand was small. The C3 production was only in breakeven level in terms of profit and loss. Due to the planned maintenance work of various refinery plants in Asia, the supply was tight. This resulted in rebound of C3 price in second half of March.

Acrylonitrile (AN) and butadiene (BD): The prices of AN and BD were pushed upward due to the maintenance work of refinery plants and the consequent tight supply. The demand of BD was increased, due to increase in the demand of downstream rubber BR and SBR, as the demand for the tyres was restored. The warmer tyre market has supported the BD price. The BD price was rebounded.

Summary in March – The Plastic Market Back to TheBuyer’sMarket

In February, the plastic market was supported by the increase in production cost of chemical plants. As the production cost kept growing, the chemical plants continuously raised the ex-factory prices. This drove the market price upwards.

In March, the production cost of the chemical plants remained high. But the upward trend was not as strong as in February.

In February and March, the downstream demand was overall weak. With the wait and see attitude for the buy side, some traders actively lowered the market price in order to reduce the inventory. They would also reduce their purchase quantity from the chemical plants. As a result, some chemical plants had pressure for increasing inventory level. But due to pressure of high production cost, the chemical plants did not actively lower the official quotation.

ABS experienced the highest volatility. It increased greatly after the Spring Festival and decreased significantly thereafter. On the other hand, the volatility of PS and PP were relatively mild.

As the sales turnover was not good, some traders which believed the ABS market would drop further,  offered very competitive price, in order to reduce the inventory to the minimum level. They would also offer even lower price for future stock, as they would expect to be able to buy at even lower price from the chemical plants later on.

Some leading chemical plants of ABS lowered the ex-factory price due to extensive pressure of high inventory level. This resulted in further price difference with other brands of ABS. On the other hand, the other chemical plants did not have pressure of high inventory. But in order to maintain the market share, they also reduced the ex-factory price.

Forecast in April – Be Cautious for Rebound

The market price in February was driven by high production cost of the chemical plants.

In March, the production cost remained high. Why was the plastic price decreased then? It was due to weak downstream demand.

 In April, would the market price lead by the buy side? If so, what would be the degree of price drop?

International Oil Price – Adjustment in High Price Level

The international oil price remained high. It was mainly due to the worry of supply interruption due to the potential sanction or military conflict between the US, Europe and Iran. On the other hand, the current supply was sufficient to support the slow recovery of global economy. The future trend of oil price would depend on the development in Iran.

The presidential election in US would be taken place in this year. The chance of war against Iran would be low. The oil price would lack the momentum for further increase. Meanwhile, in order to control the domestic inflation level, the big oil consumers in the West, including US, UK and France, have been in discussion to release strategic oil reserve. This would create downward pressure for oil price.

The cruel oil sanction on Iran would continue. There is trend for further tightening of the sanction. EU would start to increase the sanction scale since July. US has recently announced to allow 11 allies nations to start to reduce import from Iran 6 months later.

Some Middle East nations including Saudi Arabia have announced to increase cruel oil output in order to follow the action of US and Europe.

Apart from the political issue, the international oil price would also be affected by the investment market. As the international oil price has stayed in high level for a while, some investors would lock their profit. As more and more investors lock the profitto sell the crude oil simultaneously, the international oil price would have downward pressure.

There would be no clear direction for oil price at this moment, as the development in Iran is still uncertain.

Upstream Monomers – Mild Correction

The maintenance schedule of major chemical plants in Asia is near the end. As more and more chemical plants restart, the tight supply of upstream monomers will ease. It is expected that the future price would stop rising and turn to drop gradually. But the high international oil price will limit the scale of price decrease for the monomers .

Market Outlook in April

In April, it is expected the upstream monomers stop rising and turn to drop in price. The gap between production cost and market price would be narrowed down. But with the support of high oil price, the chemical plants would still face pressure for high production cost. The room for reduction in ex-factory price would be limited. In order to tackle the weak demand, the chemical plants may reduce the output, or to find other ways to consume the product.

The downstream demand would remain weak. The demand may get better in the second half of April.

PS——Limitation in Price Reduction

As the market demand remains low, the chemical plants would reduce the output. The price would remain high. Traders would tend to control the inventory in low level. The spot supply would be limited. According to figure 1, the production cost was higher than the market price. It is expected that the degree of price decrease would be limited.

ABS——Be Cautious for U Turn

The decrease in price of ABS in March was relatively large. It was mainly due to weak downstream demand. There was pressure on the inventory in the chemical plants. Some traders gave cheaper offers for future delivery. This led to continual decrease in market price. But the spot inventory of the traders was not much. At this moment, there is momentum for the rebound of spot price. The spot price is lower than the production cost. Like elastic bands, if the gap goes further, it would eventually rebound to narrow down the gap.

In the coming one month, the chemical plants would continue to have pressure for high production cost. There would be no room for price reduction, especially for those chemical plants which do not have inventory pressure. Those chemical plants which gave discounted offers recently would still be under pressure for high production cost. If they change the marketing strategies, by giving reasonable offer without executing the discounted scheme, it is likely that other chemical plants would increase the quotation.

Once this is the case, the market price would be rebounded quickly because the spot inventory is not much and some traders which have already received orders for future stock at low price level would actively replenish the stock. As to the upward price scale and the duration, it would depend on the new pricing strategies of the chemical plants and the upcoming downstream market demand.

PP – Price Increase Would Be Limited

By the end of April, the chemical plants increased the ex-factory price of PP due to cost increase for the upstream propylene monomer. But the weak downstream demand could not support further price increase. In order to have profit, some chemical plants may reduce the output or even stop production for some of the models. This may lead to supply interruption. Attention should be paid for this factor.

Suggestions

In the down cycle, in order to fix the profit, some traders would order from the chemical plants only after receiving the orders from the customers. The traders would have relatively low inventory level. At the same time, price increase would trigger the demand, and vice versa. In the down cycle, downstream factories would not rush to make purchase decision. The wait and see attitude is strong. They would generally keep the inventory at low level. Some customers would not purchase until the inventory level becomes very low.

The main method to prevent loss by the chemical plants is to reduce the output and inventory. Overall, the inventory levels for the chemical plants, distributors, traders and downstream factories would become less and less. To the critical point, the spot price would be rebounded.

It is recommended that the most important target for purchasing is to ensure smooth production by having healthy inventory level. It would be painful if the normal production is interrupted due to short supply of certain models.

It would be difficult to predict when the market inventory levels would reach the critical point. In order to prevent sudden price rebound, it is recommended to make purchase action into different phases. If the price reaches the acceptable level, and if the warehouse space and the cash flow are allowed, we recommend to keep enough stock as backup.

Appendix 1 – Major PlasticEvents

5 March 2012China lowered the 2012 GDP growth target to 7.5%. The figure, which was eight-year low, triggered the worry in oil demand. International oil price was dropped.

27 March 2012Speech from Bernanke strengthened market’s hope for further quantitative easing by the Federal Reserve. The expectation for the increase in interest rate was reduced. The dollar was under pressure, which led to increase in oil price.

29 March 2012Oil price was dropped due to discussion between France, US and UK for the potential release of strategic oil reserve.