Market Reports

Market Price Moved Up Despite Weak Market Demand

2012-02

Table of Contents

Cost Driven Price Increase for The Plastic Market 3

International Oil Price (WTI) – Volatile Political Environment Pushed Up. 6

Upstream Monomers – Tight Supply. 6

Summary in February – Cost Driven Price Increase for The Plastic Market 7

March Plastic Market Outlook – Up or Down, The Dilemma. 8

International Oil Price – Volatile in High Level 8

Upstream Monomers – The Upward Trend Would Be Slow Down. 9

Market Outlook – The Upward Trend Would Be Slow Down. 10

Suggestions. 10

Appendix 1 –. 11

Report on Recruitment Situation in China after The Spring Holidays. 11

Appendix 2 – Major Plastic Events in February. 12

 Cost Driven Price Increase for The Plastic Market

Figure 1: A chemical plant GPPS spot price, production cost and ex-factory price (December 2011-February 2012)

Data from: Hong Kong traders      GPPS production cost calculated by SM (Styrene FOB Korea) +USD150, without terminal handling charges。

Table 1: PS spot price（February 2012）

Table 2: GPPS production cost  ex-factory price  spot price fluctuation（February 2012）

On 1 February, major PS manufacturers in Taiwan announced price increase. The spot price rapidly surged following the announcement.

In the whole February, styrene monomer (SM) and butadiene (BD) were experienced upward trend. The chemical plants have been suffering from the increasing production cost.

In the second week, the chemical plants continued to increase the ex-factory price. But downstream demand is sluggish , the spot price could not catch up the increasing ex-factory price. Until the end of the third week, as the spot inventory was at low level, the PS spot price rebounded in the forth week.

Figure 2: A chemical plant ABS spot price, production cost and ex-factory price (December 2011-February 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.

Table 3: ABS spot price (February 2012)

Table 4: ABS production cost  ex-factory price  spot price fluctuation（February 2012）

With the surge of the upward raw material costs of styrene monomer (SM), acrylonitrile (AN), and butadiene (BD), the production cost of ABS at the end of February was 8.3% higher than in the beginning of the same month. With the pressure of increasing production cost, the chemical plants raised ex-factory price three times. But the increase could not catch up the increase in the production cost.

Under the influence of ex-factory price increase, the spot price moved up. But as the downstream demand remained weak, the spot price was stabilized in the third week .

As the low price inventory in the market was consumed, along with the news that the chemical plants had no plan to reduce the ex-factory price due to low inventory pressure and high production cost, the traders increased the spot price, resulted in price increase in the forth week.

Figure 3: A chemical plant PP spot price, production cost and ex-factory price (December 2011-February 2012)

Data from: Hong Kong trader   HOMO PP production cost was calculated based on C3(propylene)+USD$150 (conversion cost), without THC..

Table 5：PP spot price（February 2012）

Table 6：PP production cost  ex-factory price  spot price fluctuation（February 2012）

The propylene price reached the high level in early February, and then adjusted downward. Therefore, the production cost of PP moved up in the first week, and moved down gradually in the following three weeks.

The chemical plants increased the ex-factory price in the first half month under the pressure of increasing production cost.

However, as the downstream market demand remained weak, the relatively high spot price could not be maintained in the market. The spot market only moved up slightly in the first week, below the increment scale by the chemical plant. The spot price dropped slightly in the following two weeks.

The chemical plants gradually lowered the ex-factory price due to the weak market demand, in order to reduce the inventory level.

By the end of February, the spot inventory continued to deplete. The upstream propylene price also increased. The traders predicted that the production cost of the chemical plant would be increased gradually. The spot market price started to move up.

International Oil Price (WTI) – Volatile Political Environment Pushed Up

Fig 4：WTI（December 2011-February 2012）

Data from：NYMEX

The growing tension between Iran and the West led to the concern about interruption of the cruel oil supply. The international oil prices continued to move up.

Toward the end of February, WTI adjusted downward before reaching USD110/barrel. The global economic recovery is slowly ,increasing demand for crude oil is less than the supply, which can’t support the present oil price. The investors started to lock the profit. The tension in the Middle East would continue to be the dominant factor in affecting the oil prices in the coming month.

The average WTI in February was USD102.11/barrel, 2.06% increase compared with January average.

Upstream Monomers – Tight Supply

Fig 5：Monomer Price （December 2011-February 2012）

Table 7：SM C3 AN BD fluctuation（February 2012）

Plenty of chemical plants in Asia would be under maintenance in coming March and April. The supply of upstream monomers would be tightened. The raw materials of ABS and PS, including styrene monomer (SM), acrylonitrile (AN), butadiene (BD) etc. soared significantly. Worse still, it was heard from the market that the supply of BD was extremely tight. The limited BD supply affected the production capacity of the downstream ABS plants.

The propylene (C3) supply was reduced. However, the downstream demand of PP was decreased more. The PP price started to move down since mid February. On the other hand, the increase in the international oil prices led to the increased production cost of C3. The downward movement of PP was limited as a result. At the end of the month, the PP price in Asia was stabilized, initiated by the rebound of PP price in the domestic market in China.

AN and BD experienced the biggest increase in February, resulted in increasing production cost of downstream ABS.

Summary in February – Cost Driven Price Increase for The Plastic Market

The average WTI in February was about USD100/barrel. The price of upstream monomers was supported by the continual increase in the international oil price. In addition, from February to April, various monomer plants in Asia would be under maintenance. The supply of upstream monomers would be tightened. The upstream monomer price moved up due to the high production cost and tightened supply as mentioned above. Only propylene dropped after reaching new high due to the weaker downstream demand.

As the upstream monomer cost moved up, the production cost of the chemical plants continued to increase. However, they keep low production rate since the end of 2011 which balanced the inventory level. Without the pressure of overstock, facing the increasing production cost, the chemical plants gradually increased the ex-factory price.

Some customers were not urgent in purchasing as they kept some inventory before the Spring Holidays. As some of the factories resumed their normal operation later than expected, the downstream demand was yet to recover. The spot market transaction was not strong. There was still some inventory with lower cost, but the quantity was limited.

In this weak transaction environment, sentiments of the traders on the plastic price trend are different. Some traders reduced the spot price. This resulted in some downstream manufacturers started to replenish their stock level. On the other hand, some other downstream manufacturers regarded this as the start of the downward trend. Their wait-and-see attitude grew up further.

The spot price adjusted slightly. However, the high production costs of ABS and PS prevented the ex-factory price from moving down. Even the sales turnover was low, the chemical plants continue to increase the ex-factory price. As the continual depletion of the spot inventory with lower cost, there was no room for trader to lower the price further. The spot market price started to rebound. For PP, as the competition among PP chemical plants was keen, the spot supply was abundant. The downstream demand could not catch up the supply.

March Plastic Market Outlook – Up or Down, The Dilemma

Will history repeat again? The plastic price moved up despite weak downstream demand. With the lack of strong market demand, to what extent would plastic price go up? Under the pressure of increasing production cost, is there any room for plastic price to go down?

International Oil Price – Volatile in High Level

The major factors in affecting international oil prices recently include the nuclear tension in Iran, Europe debt crisis, the increasing or decreasing market demands associated with the economic situations.

If Iran nuclear tension upgrades further, the oil prices would continue to surge.

Once there is war in the Middle East, it is not impossible for the WTI to reach USD150/barrel. Is it likely to have the war? The West would not want to see the oil prices to grow up further, as it would worsen the economic recovery in US and Europe. Therefore, the West would not want to have war.

As the cruel oil is the major income for Iran, once the war begins, Iran would lose their major income.

Would the tension between US and Iran grow further? Maybe it’s just a competition to both sides (US and Iran), for the coming election ,for the bargaining power in the future negotiations between US and Iran. It is still unclear about the future trend. Before that, the international oil prices would stay at high level.

There is no indication that the Europe debt crisis would be worsened further at this moment. It is predicted that the debt crisis would not exert large impact to the international oil prices significantly.

As seen from the current economic data, the economy is slowdown. In the Congresses holding in Beijing , China lowered the GDP growth expectation below 8%, showing further sights of economic slowdown. This would lead to reduced demand for the cruel oil.

The recent oil prices were mainly influenced by the regional political tension. The actual demand could not support oil prices at high level. Once the tension in Middle East is reduced, the international oil prices would be restored to the reasonable level. In the short term, the Iran situations should be closely monitored.

Upstream Monomers – The Upward Trend Would Be Slow Down

In the coming future, the high international oil prices would support the prices of upstream monomers, including SM, C3, AN and BD.

There would be maintenance schedule in some of the large chemical plants in Asia from February to the middle of April. The tight supply of monomers would be lasted for a while. Beginning from late March, the supply shortage would be eased as some of the chemical plants would complete the maintenance. There would be room for price adjustment for the upstream monomers.

Since the end of 2011, the prices of the upstream monomers have moved up. The downstream chemical plants experienced growing pressure of increasing production cost. On the other hand, the downstream demand is not yet recovered. The sales turnover is still poor. With the worry of growing production cost, the chemical plants would reduce the plastic output. This would reduce the demand of upstream monomers, and limit the further increase in monomer price to some extent.

Market Outlook – The Upward Trend Would Be Slow Down

In the coming future, the chemical plants would continue to face pressure of high production cost. As the ex-factory price is still below the production cost, there would be no room for the chemical plants to reduce the ex-factory price. Meanwhile, as the upstream monomer supply is limited, and the demand of downstream manufacturers is not strong, the chemical plants would keep their production capacity at conservative level, to control the inventory effectively.

The demand for the spot market would be recovered. But some downstream factory would be resistant to buy the raw materials at high prices in low season. Just-in-time procurement or wait-and-see attitude would be prevailed. The traders would be cautious and conservative about the continual increase in the plastic prices since last December. The traders would mainly target for stock replenishment. The spot inventory would be kept at relatively low level. The spot supply would be reduced gradually.

The demand of the downstream manufacturers would be improved in March compared with February. But as the economic status in Europe, US, and even China would not be strong, the market demand would not be optimistic as compared with last March.

In the first half of March, the high production cost will support the plastic prices. But the increase in price would be limited by weak downstream demand. Towards the second half of March, there may be downward correction as the pressure of high production cost would be reduced. Towards April, the downstream demand would be strengthened. These two opposite factors would finally influence the coming price trend.

Suggestions

Catch The Chance of Price Adjustment at High Level

The recent increase in plastic price was driven by increase in production cost. The chemical plants are forced to increase the price, without room for price adjustment. When there are still some spots with the old lower cost，the market price will be lower than normal level. At this moment, the downstream manufacturers could catch the chance for price negotiation in order to replenish the stock and lower down the average raw material cost to some extent.

Appendix 1 –

Report on Recruitment Situation in China After The Spring Holidays

Briefing about The Recruitment Situation for Downstream Manufacturers after The Spring Holidays

In recent years, we would hear people saying about difficulties in recruiting new factory workers after the Spring holidays. With the development of Chinese enterprises, the living standards continued to increase. The living costs in the costal areas have been increasing continuously. A portion of people living in non-costal areas decided to work nearby instead of working far away from their home towns to the coastal areas. The factories in the coastal areas, including Guangdong province, continued to experience difficulties in recruiting enough workers.

We have recently conducted survey to the factories of various kinds of industries by personal visits and telephone discussion to explore the recruitment situations. We would share with you some of the suggestions and experience here.

From the analysis of the survey data, 90% of the factories were required to recruit new staff. Half of these factories regarded recruitment process as difficult, while the remaining half regarded it as relatively smooth. Apart from meeting the Chinese national standards about the wages, social security measures and labour holidays, most of the factories would consider the following 4 points regarding human resources management。

1. Strengthen the welfare: Improved the staff welfare, took care of the after-work activities, with offering of the resources like library, karaoke, leisure room, and other activity recourses, in addition to outside tour, improved food quality and year-end bonus.
2. System of reward: with the establishment of outstanding staff award in a regular basis, to encourage staff to work better
3. Promotion scheme: high quality professional training could be provided to the staff along with good promotion scheme. This can create the opportunity and hope for the staff to advance themselves to higher position with improved living conditions.
4. Strengthen the communication channel: special care to staff of various ages, especially young staff, by showing respect and care to create mutual understanding environment

On the other hand, some labour intensive industries, with characteristics of low gross profit and regularly changing product design which prevent the setting up of automation facility, were difficult to improve worker salary and welfare. With the boring working environment, they found it hard to attract young generation. With such weak competitive power, the labour shortage has reached 40%.

The survey also showed some factories with competitive salary package and welfare. They could offer better working environment and considerate management. The staff turnover has been relatively low. The turnover rate was below 15% in regular period and around the Spring holidays. They had little difficulty in recruitment. Some of these factories also setup automation equipment to replace some of the labour.

Finally, the present operation mode is much different from the past. In the past, it was not easy for the workers to find job. Now, on the contrary, the factory was not easy to find workers. The employers need to think from the viewpoints of the workers. For the enterprises to excel themselves, they need to care every aspect, including sales, product, production management, logistics, and purchasing. Each of the above sector can either make profit or loss. It is important to realize that having a unified team of workforce having the same vision and ambition can tackle the problems relatively easily.

Appendix 2 – Major Plastic Events in February

13 February          With the pressure of surging monomer costs, Chi Mei announced to increase ex-factory price of ABS by USD120/MT, to USD2,220/MT.