Market Reports

High ProductionCost VS Weak Market Demand

2012-04

 

 

By Ben Hui, Jessie Chang, Marketing Department of Sunta Chemical Ltd. www.sunta.hk

 

 

Despite weak market demand, the production cost of the chemical plants remained high.  It was difficult for the downstream manufacturers to tackle high resin price. On the other hand, the chemical plants were reluctant to sell the resins below cost. The market price was influenced by the above two factors. Which of these two factors would be more influential to the resin price in May?

By Ben Hui, Jessie Chang, Marketing Department of Sunta Chemical Ltd. www.sunta.hk

By Ben Hui, Jessie Chang, Marketing Department of Sunta Chemical Ltd. www.sunta.hk

 

Table of Contents

Review of plastic market in April 2

High Production Cost But Weak Market Demand. 2

International Oil Price (WTI) – Continued The Downward Trend. 6

Upstream Monomers – Some Dropped, Some Risen. 8

Summary in April – High Production Cost VS Weak Market Demand. 9

Forecast in May – Adjustment Period. 10

International oil price – mild correction. 11

Upstream Monomers – Downward Pressure. 11

Forecast in May – Downward Adjustment 12

Suggestions. 14

Appendix 1 – Special topic in April – duty free imported plastic resins. 15

Appendix 2 – Major plastic events. 18

 

 

Review of plastic market in April

High Production Cost But Weak Market Demand

PS

In early April, the upstream styrene monomer (SM) extended the price increase. Due to the higher production cost and less supply, the price of PS was supported and ramped up in the first half of April. In the second half of April, as the upstream monomer price dropped, the wait-and-see attitude was increasingly dominant. The spot market price of PS started to move downward(see Figure 1).

 

Although the downstream demand is not good, due to the less supply from the chemical plants, the market price of PS is still higher than the production cost of PS.

 

In 2008-2012, the price of PS steadily moved up except in 2009 due to the financial tsunami. 2010 saw the biggest increase after the financial tsunami, with 32% increase compared with the previous year. After that, the scale of increase was reduced. In this April, the price was slightly lower than the price in April 2011 by 1% (see Figure 2,Table 1).

 

Figure 1: A chemical plant GPPS spot market price, production cost (February-April 2012)

 

Figure 2: A chemical plant GPPS spot market price in April（2008-2012）

 

 

Table 1: PS spot price fluctuation

	2012	April of 2009 vsApril of  2008	April of 2010vsApril of 2009	April of 2011vsApril of  2010	April of 2012vsApril of  2011
	April vs March
GPPS	↑0.72%	↓28%	↑32%	↑11%	↓1%

 

ABS

In the first half of April, the production cost of ABS maintained in high position. One major chemical plant was reluctant to continuously offer discounted price even their inventory level was high. Other chemical plants without inventory pressure expressed that they would not lower the price. Traders and distributors maintained low inventory level in March when the price moved downward. As the spot supply was limited, meanwhile the traders expected the chemical plants wouldn’t lower the price further , they adjustedthe market price upward step by step.

 

The peak season of downstream demand was delayed. The market was cautious towards the price increase in ABS. The weak market turnover of ABS could not support the upward movement of ABS price. In the second half of April, the price of ABS moved downward. In the same period, the price of upstream monomers plunged greatly. These included acrylonitrile (AN, 25% by weight of ABS), butadiene (BD, 15% by weight of ABS).The market expected the production cost of the chemical plants would be reduced significantly. Traders and distributors reacted by reducing the market price as they worried the future price would be further decreased. The downstream demand was weakened, which further pushed the market price of ABS downward.

 

The price of ABS in April 2012 was reduced by 2.28% compared with the price one month ago. In 2008-2012, the price was increased in April except 2009. However, the price in April 2012 was 10% lower compared with the price one year ago. The reduction in scale was more significant than PS（see Figure 4, Table 2）.

 

Figure 3: A chemical plant ABS spot market price, production cost (February-April 2012)

 

Figure 4: A chemical plant ABS spot market price in April（2008-2012）

 

Table 2:ABS spot price fluctuation

 

PP

 

The price trend of PP in April basically followed the trend of the production cost. In early April, the upstream propylene (C3) surged, pushing the price of PP upward as well. Take Homo PP as example, the price moved up by 2.5% in one week. In the second half of April, as the price of C3 dropped, the price of PP was also reduced. The price in April was 3.37% higher than the price in March(see Figure 5).

 

For Homo PP, in 2008-2012, the price was often increased in April. In 2009 with the financial tsunami, the price volatility of Homo PP was large, but its volatility was still smaller than other resins, like PS and ABS. The price of homo PP in April 2012 was dropped by 19% year by year (see Figure 6, Table 3).

 

Figure 5: A chemical plant HOMO PP spot market price, production cost (February-April 2012)

 

 

Figure 6: A chemical plant HOMO PP spot market price in April（2008-2012）

 

Table 3:HOMO PP spot price fluctuation

	2012	April of 2009 vsApril of  2008	April of 2010 vsApril of 2009	April of 2011 vsApril of  2010	April of 2012 vsApril of  2011
	April vs March
HOMO PP	↑3.37%	↓30%	↑39%	↑21%	↓19%

 

International Oil Price (WTI) – Continued TheDownward Trend

The international oil price maintained at high level in March due to the nuclear tension for Iran. The tension which lasted for 15 months was eased owing to the negotiation between Iran and the West on 14 April, also the second round of negotiationwill be on 23 May. Investors were positive to the news. The international oil price was decreased.

 

In the Netherlands, there was risk for credit downgrading due to the difficulties for cutting the government expenditure. In Spain, investors were cautious for its budget cutting due to the high interest rate of the newly issued government bond. The market was not positive toward the Europe debt crisis. The oil price lost the support.

 

Both the ease of Iran nuclear tension and the worry on Europe debt crisis pushed the oil price downward. But there was no further development for these two issues. The international oil price showed little volatility following the decrease in early April. Overall, the price in April was reduced by 3% compared with March(see Figure 7).

 

Figure 7: WTI (February-April 2012)

 

Figure 8: WTI in April (2008-2012）

 

 

Table 4:WTIfluctuation(2008-2012)

	2012	April of 2009 vsApril of  2008	April of 2010 vsApril of 2009	April of 2011 vsApril of  2010	April of 2012 vsApril of  2011
	April vs March
WTI	↓3%	↓55%	↑67%	↑31%	↓6%

Upstream Monomers – Some Dropped, Some Risen

Various chemical plants in Asia resumed the normal production in Quarter 1. It was expected that the price of the monomers would decrease due to increasing supply. However, there were some accidents.

 

Styrene monomer (SM):

There was accident in the facilities in Shell’s European plant, resulted in surge in SM price in Europe. As the market worried that Europe would buy more SM from Asia, the price of SM in Asia was increased.

Moreover, the price of benzene (BZ), one of the raw materials for SM, maintained at high level. The price of SM was hence supported. Even the downstream demand was not positive, with the aboveissues, the price of SM was maintained at high level (see Figure 9).

 

Propylene (C3):

Japan’s Showa Denko delayed the resumption of C3 production by 2 months, to the end of May. The market reacted by an increase of USD 45 FOB Korea in one single day. Afterward, Taiwan's refining firm CPC was forced to shut down its production facility due to an fire accident. The price of C3 was pushed upward. In the middle of April, the price of C3 reached the year high at USD 1505. The weak downstream demand limited the further increase in price. Meanwhile, CPC resumed the production one week after the accident. In the end of April, C3 price decreased( seeFigure 9).

 

Acrylonitrile (AN):

The demand of ANwas weak due to the weak demand for downstream products like AF and ABS. Some chemical plants planned to reduce the output of AN in May.

 

Butadiene (BD):

The downstream BR and SBR synthetic tyre factories were running at loss. The tyre output was reduced, which led to reduced demand and price decrease of BD.

 

Figure 9: Monomers (2008-2012）

 

 

 

Summary in April – High Production Cost VS Weak Market Demand

In April, the production cost of the chemical plants remained high due to the strong monomer cost. Because of this, there was no intention for the chemical plants to reduce the selling price. One major chemical plant said that even they had inventory pressure, they would not give discounted offer for reducing the stock.

The spot inventory of the plastic traders was less. Some traders which were negative to the future pricingtried to make profit by taking the orders with lower than the market price for the future delivery before. However, these traders, upon realizing that the chemical plants had no intention to lower the ex-factory price, quickly secured the stocks from the spot market. The spot price surged quickly accordingly.

 

The market demand was weaker than expected. The downstream manufacturers maintained their wait-and-see attitude after the resin price surged. In the second half of April, the upstream monomer price moved downward. The traders expected that there would be room for the chemical plants to lower the ex-factory price. Moreover, the business of resin trading was not good. Therefore, the traders started to lower the price.

 

In the first half of April, the market price was driven by the relatively high production cost. In the second half of April, it restored to the buy-side market again.

Forecast in May – Adjustment Period

Since the beginning of 2012, the international oil price has stayed above USD100/barrel due to the regional political tension. This led to an increase in monomer price. A serious of maintenance works in the chemical plants further pushed the monomer price upward. As a result, the resin price was maintained at high position.

 

In the future, the price of upstream monomer would have downward pressure due to increase in supply. On the other hand, the downstream manufacturers should enter the peak season. The change in market demand, from originally weak demand to coming strong demand, would somehow support the market resin price.

 

International oil price – mild correction

Since the beginning of 2012, Iran’s nuclear tension, the major event to push the oil price upward, has gradually eased. Other events, like Europe debt crisis, the economic recovery status of USA, and the growth rate of the developing nations including Asia, become more influential to the oil price.

 

Entering in 2012, the global economic recovery has been slow. China even lowered down the target GPD growth rate. On the other hand, OPEC, led by Saudi Arabia, has promised to increase the oil output to suppress the high oil price, in order to speed up the economic growth. Such decrease in demand and increase in supply should push the international oil price down further in the coming month.

Upstream Monomers – Downward Pressure

The peak season for maintenance work was over. The upstream monomer plants have gradually resumed the normal production. The situation of tight supply would be eased.

 

As the upstream monomer cost was high previously, the production cost of the chemical plants could not be lowered. However, the sales turnover was not good due to weak market demand. Some chemical plants started to stop production or cut the running rate. For example, the SBR and BR production by Kumho Korea, LG Korea, and TSRC Taiwan has been reduced. SBR and BR are the downstream products of BD.

 

The increase in supply, reduce in demand, and the mild correction of international oil price, will continuously put the upstream monomer price in pressure to move downward.

 

Forecast in May – Downward Adjustment

Even though the downstream market demand was weak, the resin price kept in high level due to high production cost. In the coming one month, it is expected that the production cost would go down. Some chemical plants are expected to lower the ex-factory price, especially for Homo PP and PS because these resins had ex-factory price higher than the production cost. As to ABS, although the production cost has been higher than the ex-factory price, the poor market demand would lead to some major ABS plants to lower the ex-factory price in order to reduce the inventory pressure.

 

We often say that the price can drive demand. That means when the price drops, the demand is dropped consequently. The market price has dropped for half months. There would be downward pressure for the oil price and upstream monomer price. The market is negative toward the future price. The wait-and-see attitude of the downstream purchasers has been growing. They are often not urgent to make purchasing action. This would drive the demand downward, which in turn would drive the resin price downward.

 

The peak season for plastic resin consumption begins in May traditionally. The demand should go up gradually. This could give support to the market price of resins. In the May of the last 5 years, apart from 2008 when there was financial crisis, it showed downward movement in both 2010 and 2011. One reason was that in 2010 and 2011, it was peak season for maintenance work for the upstream monomer plants from January to March. The monomer price moved up due to reduced supply. It also led to increase in plastic price. When the monomer price moved down after the peak maintenance work was over, the resin price went down. The resin price would also be affected by the variation in market demand. The following information was shown for your reference (see Figure 10).

 

 

Figure 10: A chemical plant GPPS 、ABS、HOMO PP spot market price in May（2008-2012）

GPPS

 

ABS

 

HOMO PP

 

Suggestions

In the downward trend, it is the buy-side market as the buyers have higher negotiation power. But please pay attention to the followings. The plastic price has been fluctuated significantly in recent years. The rebound could be significant following the plunge in price. The traders are often reluctant to keep large inventory. The spot inventory of the traders would become less and less. Moreover, the chemical plants tend to adopt Just-in-Time policy to reduce their own inventory. The lead time of some models could be very long. For example, there are only limited production lines of PP for some of the chemical plants. Some PP with better selling would be arranged for production more often. This could affect the production lead time of some PP models with weaker selling. Therefore, customers may not be able to buy the resins in time. We suggest customers to keep sufficient inventory level for ensuring normal production. They can frankly offer target price to the suppliers in advance for better price negotiation.

 

In the downward trend, some traders may offer price for future delivery to customers even the traders do not have the stock. On the other hand, some major agents could be cautious to keep high spot inventory. They would try to lower the inventory level by reducing the purchase volume from the chemical plants. In this way, there would be risk for failure to deliver the product on time. Therefore, we suggest customers not only consider the price, but also the creditability and the suppliers for prompt delivery. The customers can also buy from several suppliers to reduce the risk.

 

 

 

 

 

 

 

Appendix 1 – Special topic in April – duty free imported plastic resins

 

The origin of duty free plastic resins

 

In 4 November 2002, China and the Association of Southeast Asian Nations (ASEAN) which include Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam as member countries signed the Framework Agreement on Comprehensive Economic Co-operation.

 

In 2003, Mainland China signed with Hong Kong and Macau respectively the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) and Mainland and Macau Closer Economic Partnership Arrangement (also called CEPA).

 

In 29 June 2010, China and Taiwan signed the Economic Cooperation Framework Agreement (ECFA).

 

According to the above agreements, both sides would offer reduced tariffs for some kinds of goods imported from the counterparts. In 2012, a considerable amount of plastic resins imported into China would become duty-free. For details, please refer to the table below.

 

What advantages could we receive from the duty-free products?

 

The agreements resulted in the reduction of imported tax by 5% to 6.5%. The imported duty-free resins become more competitive locally in China. In other words, we could buy high quality imported resins with prices similar to the resins locally produced in China.

 

To some factories which can import the resins with handbooks and buy the resins with RMB, the duty-free resins give them the flexibility to choose between the 2 methods.

How to operate?

 

Method 1

 

The factory can buy from the traders or manufacturers directly in USD. The factory needs to carry out the customs clearance and transportation by themselves. For customs clearance, China Customs would request the original documents of certificate of origin, invoice, packing list, purchasing contract, etc.

 

As to the certificate of origin, it is issued by the certified organization in the exported country. The buyer’s name is showed in the certificate. The certificate is usually delivered together with the bill of lading and packing list. If the customer intends to import by themselves without tariff, they needs to notify the chemical plants when they place the order.

The detailed requirements could be requested to the suppliers.

 

During customs clearance, China Customs would charge 17% tax. The amount is 17% of the invoice amount after conversion to RMB.

 

The risk of customs clearance by yourself is that sometimes the customs would challenge the buying price showing on the invoice. Sometimes the customs could ask for extra information like ex-factory price of the manufacturer, insurance document etc. It could be difficult to obtain such extra information in short time. This could lengthen the time of import.

 

 

Method 2

 

To buy directly from the agents or distributors in RMB. The buyer does not need to carry out the customs clearance by themselves, so that they could get the resins promptly and avoid the unnecessary troubles.

Table of duty free plastic resins (where ASEAN means Association of Southeast Asian Nations)

Resin	HS Code	Description	Country of Origin	Country of Origin	Manufacturers	Brand
Homo PP	39021000	Polypropylene, in primary forms	ASEAN	Thailand	IRPC	1100NK
Block PP	39023010	Ethylene-propylene copolymers, in primary forms	ASEAN Taiwan	Singapore Malaysia Malaysia Taiwan Taiwan Taiwan Taiwan Taiwan Taiwan Taiwan	Exxon Titan Titan Formosa Formosa Formosa Formosa LCY Yungsox Yungsox	7032E3 SM340 SM240 K8003 K8009 K8025 K8050 7533 3015 3040C
ABS	39033090	Other acrylonitrile-butadiene-styrene copolymers,in primary forms	ASEAN	Thailand	IRPC	GA850
Transparent ABS	39069090	Other acrylic polymers, in primary forms	ASEAN Taiwan	Malaysia	Toray	920
GPPS	39031990	Other primary shape polystyrene	ASEAN Hong Kong	Singapore Singapore Hong Kong Hong Kong	Denka Denka Dow HKPC	MF21-301 MW-1-301 666H 1841H
HIPS	39031990	Other primary shape polystyrene	ASEAN Hong Kong	Hong Kong Thailand	HKPC IRPC	SR600 HI650
AS	39032000	Styrene-acrylonitrile copolymers, in primary forms	ASEAN Taiwan	Taiwan Taiwan Taiwan Taiwan	Chi Mei Chi Mei Chi Mei Formosa	117L200 117C 127L150 2200AE
SBC	39039000	Other polymers of styrene, in primary forms	ASEAN Taiwan	Singapore	Denka	NSBC 210
PC	39074000	Polycarbonates, in primary forms	ASEAN Taiwan Hong Kong	Taiwan	Chi Mei	110
PMMA	39061000	Poly ( methyl methacrylate ), in primary forms	ASEAN Taiwan	Taiwan Taiwan	Chi Mei Chi Mei	CM205 CM211

 

Appendix 2 – Major plastic events

 

6 April 2012

Taiwan's refining firm CPC was forced to shut down its No.5 cracker following an explosion at the site. The production of ethylene, propylene and butadiene was stopped. As the market supply of butadiene was sufficient, its price was unaffected. However, the propylene price surged accordingly.

 

14 April 2012

The tension for Iran's nuclear issue was eased with the announcement of new discussion in Baghdad on 23 May. Investors were positive to the news. WTI future was decreased.

 

 

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