2012-07
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Limited Supply & Rising Price in the Plastic Market |
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Marketing Department of Sunta Chemical Ltd Kim Lin www.sunta.hk
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PLASTIC MONTHLY REPORT IN 2012 (No 29)
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Table of Contents
Plastic Market in July—The Upward trend continues due to short in supply. 3
International Oil Price (WTI)—A slow increase after constant falling. 3
Upstream Monomers —The upward trend continues. 4
Summary of July. 9
Forecast in August—Supply relaxes, Price tends to stabilize. 9
International Oil Price（WTI）--Stable, could possibly fall 9
Upstream Monomers—The upward trend lacks strength to hold. 10
Forecast conclusion—A rational downward adjustment. 11
Suggestions. 13
Appendix 1 - Special topic in August-Thoughts from shipment delay. 14
Appendix 2-Major plastic events. 18
Plastic Market in July—The Upward trend continues due to short in supply
The fact that the plastic Market in Julywas in short supply has led to a price increase. Chemical plants faced production cost pressure externally.But internally there is no pressure on the stock. So they continue to increase the selling price. Traders have kept the inventory on the low side in recent 2 months. Together with continuous shipment delays, the short supply in spot market intensifies. The upward trend continues.
International Oil Price (WTI)—A slow increase after constant falling
The downward trend of International Oil Price has ended in July and rebounds slowly.
As the Norwegian workers held a strike in early July, the price started to rebound. Later, tension in the Persian Gulf grew again. The International Oil Price rises 7 times in a row. The percentage increase is 10%.
The Oil Price maintained the upward trend for a short period. Later due to debt crisis, the Spanish local governments sought help from the central government in order to pay the debt. This news triggered the alarm of the European sovereign-debt crisis again and the oil price went down right after. It was followed by declarations from Germany and France that they are supporting the Eurozone. The European Central Bank promised to protect the EURO. The oil price rebounds for 2%.
On average, the international oil price was US$88/barrel in July. When comparing with June, there is a 6% increase.
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July average: USD88 |
Data from：NYMEX
Upstream Monomers —The upward trend continues
Table 1： Volatility Scale of The Market Price of GPPS（July in 2012）
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Value/volatility scale |
SM |
C3 |
AN |
BD |
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July average（USD/MT） |
1364 |
1280 |
1659 |
2407 |
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Late July Vs Early July |
↑5% |
- |
↑15% |
↑6% |
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July Vs June |
↑9% |
↑6% |
↓2% |
↑24% |
Data from： Chem99
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SM |
Data from：Chem99
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AN |
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BD |
Data from：Chem99
The upstream monomers stopped falling and rebounded in mid-June. It followed the upward trend of oil price and the trend continues.
Influenced by the rebound of oil price, the price of Styrene （SM）in July has risen by 9% when comparing with June. Propylene（C3）has once surged to USD1324. The olefin plant in Taiwan resumed work in mid-July, the short supply of Propylene（C3）has thus relieved. As the market demand remains normal, the price of Propylene（C3）went down and the rise accumulated before diminished. By the end of July, it has returned to the price early this month.
The price of Acrylonitrile（AN）falls by a slight 2% when comparing with June. It has risen by 15% throughout July. The price increase of Butadiene (BD) in July is more significant. It was a 24% increase then that in June. It has gradually returned to the price level in early May.
The trend in the plastic resins market—a tentative upward trend
ABS
Table 2：Volatility Scale of an ABS market（2012 July）
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July 2012 Vs July 2011 |
Late July Vs Early July |
July Vs June |
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ABS ↓7% |
↑7% |
↑7% |
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Data from：Hong Kong Traders
Figure 3：The comparison of spot price and production cost in an ABS market（2012 May - July）
Data from：Hong Kong Traders
The cost of ABS in the figure is calculated by 0.6*SM（Styrene）+0.25*AN（Acrylonitrile）+0.15*BD（Butadiene）+US$300.It hasn’t included terminal handling charges.
The spot price and production cost of ABS are on a rise since mid-June. The spot price has increased by 7% throughout July. The production cost has also risen by 7%. By the end of the month, the spot price is USD90 more than the production cost.
PS
Table 3：Volatility Scale of an GPPS market（2012 July）
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July 2012 Vs July 2011 |
Late July Vs Early July |
July Vs June |
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GPPS ↓2% |
↑6% |
↑3% |
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Data from: Hong Kong Traders
Figure 4: The comparison of spot price and production cost in an GPPS market（2012 May - July）
Data from：Hong Kong Traders
The cost of GPPS in the figure is calculated by SM（Styrene）+US$120. It hasn’t included expenses like terminal handling charges.
The price of Styrene（SM）, the monomer raw material of synthetic PS goes up. It increases the cost of PS and the upward pressure of the production cost of PS. The spot price in July has risen by 3% when comparing with June. By the end of the month, the spot price of GPPS is USD56 more than the production cost.
PP
Table 4：Volatility Scale of an HOMO PP market（2012 July）
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July 2012 Vs July 2011 |
Late July Vs Early July |
July Vs June |
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HOMO PP ↓9% |
↑1% |
↑4% |
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Data from：Hong Kong Traders
Figure 5: The comparison of spot price and production cost in an HOMO PP market（2012 May - July）
Data from：Hong Kong Traders
The cost of HOMO PP in the figure is calculated by C3（Propylene）+US$120. It hasn’t included terminal handling charges.
Starting from late June, the price of HOMO PP has kept rising steadily. Given that there is not much HOMO PP in stock, its spot price remained high overall. The spot price of HOMO PP increases only by a mere 1% throughout July. The price in July is a slight 4% more than that in June.
Summary of July
During the falling phase in May, the chemical plants have decreased the rate of operation to reduce the inventory. When it comes to July, the inventory reduced. By the support of cost, the chemical plants have plenty room to increase the mill price.
At the early stage of the falling phase, traders have kept a lower level of their own inventory. The will also receive longer-dated orders. As delay in shipments happened to be serious in July this year, the settlement period of goods purchased by traders is affected. The supply in the market has become less and less.
The downstream manufacturers were having a wait and see attitude at early stage. When the price went up in July, the downstream demand took advantage of the occasion to replenish their stock. To a certain extent, this boosts the market demand. There was already a scarcity in stock on hand, the tension resulted from the fact that there areno goods to buy grows.
ABS was affected by the shipment delays. There is not much stock in the market and the price increase is more significant. The contango between the spot price and the production cost is larger than that of PS and PP.
Forecast in August—Supply relaxes, Price tends to stabilize
International Oil Price（WTI）--Stable, could possibly fall
The average International Oil Price is USD89 in the past 3 months. It is steady overall. It is predicted that there won’t be much difference in August.
It has been a month since the embargo against Iran on 1st July. Looking back the trend of oil price in July, it seems that there is no persisting high price level resulted from the embargo. The market has gradually adapted to such a change.
The Geopolitics in the Middle East is still holding the nerves of the oil market. If violence there intensifies, the oil price will increase. However, August is the month when various parties’ national conventionsprior to the national election were held in the USA. The USA would also like to see that both oil price and the economy remain stable.
Given that there is a sense of worry resulted from the European sovereign-debt crisis, there may be a fall in oil price as well. Also, the US Federal Reserve stated that she hasn’t launched a new round of expansionary policy. She only implied that she might prepare to purchase more bonds to boost the US economy. The next interest rate discussion of the US Federal Reserve will be held on 12th to 13th September.
Above all, the oil price in August is stable, but could still go down when considering various aspects.
Upstream Monomers—The upward trend lacks strength to hold
Being products of the oil industry, various upstream monomers are closely related to the International Oil Price. Upstream monomers maintained the upward trend in July. The accumulated rise has already increased the downstream cost pressure. Whether the market can digest it will be the key determinant of how the after-market will go.
Styrene（SM）is affected by the unenthusiasticEuro-American economic condition as the building decoration and automobile industry developed slowly. This makes the breakthrough in the demand of EPS and synthetic rubber (for manufacturing tires) hard.
The price of Propylene (C3) has returned to stable in late July. The market supply was slowly relieved due to replenishment of imported supplies.
The market of Acrylonitrile, a downstream product ofacrylic fibers in July can’t be considered as prosperous. The price of Propylene remained stable most of the time. This made the price of Acrylonitrile hard to rise.
The market of Butadiene, a downstream product of Synthetic rubberhas reflected an average demand at the earlier stage of market. The high level of inventory in tire factories also reduced the sustainability of the demand of Butadiene.
At the same time, the intense heat of summer in August also brings some difficulties to the storage of monomers. The monomers used by chemical factories as raw materials of plastic manufacturing may decrease by a certain extent.
By all accounts, upstream monomers face cost supports and limited demand. Its price is difficult to climb in August. However, even if there is such a downward adjustment, it will be a limited one as the traditional peak season.
Forecast conclusion—A rational downward adjustment
As it is still the typhoon season in the coming August, we cannot exclude the possibility that the weather may affect the market supply of plastic raw materials once again.
While oil price and monomers fluctuate at a high price, chemical plants will have pressure on cost, as well as some rooms for profits. There exists a healthy relationship – a contango between cost, and market price.
ABS
The market supply of ABS relives a bit because of continuous stock replenishments. The number of suppliers grows continually. This makes the downstream purchasing atmosphere start to relax. Also, the replenishments and the gradual release of downstream demand will strike a balance between themselves. In the coming month, besides irresistible factors like rainstorms or typhoons, the upward trend of ABS may rest a bit. The price will thus become stable and may rebound slowly and rationally. But the extent is limited.
PS
The overall demand in July was not impressive, but the production quantity wasn’t large as well. Traders bought a smaller amount from chemical plants and this made the number of PS circulating in market small. August is a traditional peak season of production. Although the peak season comes a little bit late for some industries, the room for PS to fall is limited as the supply isn’t slack.
PP
As the propylene price kept stable, the cost of PP doesn't fluctuate a lot. The PP production of Formosa Chemicals &FibreCorporation (FCFC) has suspended since the short circuit power glitch in June. There were new offers starting in mid-July. In the coming August, the short supply of FCFC’s PP will relieve. Imported PP from places like Saudi Arabia and India will continually replenish the stock. There will be slight adjustment of market price.
The market supply of plastic raw materials tends to relax. Theoretically this should help to stabilize the price. However we should keep an eye on chemical plants to see if they will maintain the reduction of output at the same time. Also, the downstream factories have now entered the traditional peak season of production. Whether the increase in demand of raw materials resulted will keep the market price of plastic raw materials up is to be kept watch for.
Suggestions
In early August, as the chemical plant has accumulated the extent of an increase last month, the rising trend may diminish or remain steady when it opensagain, so as to observe the acceptance ability of the market. The market also needs time to re-adjust.
When market changes, it’s hard for downstream factories to direct how the market goes. But they can adjust their merchandising mindset and strategy. It is suggested that they should keep a secure amount of inventory on the premise of profit is locked. Then depending on the situation from manufacturer offer, replenish the stock at different phases, hold stock at the right time and try their best to diversify the risk of merchandising. At the same time, customers can also consider some substitutive brands as alternate materials. This can allow you more choices when the material supply changes.
Appendix 1 - Special topic in August-Thoughts from shipment delay
Under economic globalization, the enhancement of the ability to control the date of delivering orders has already become one of the key elements of measuring the competitiveness of manufacturing enterprises. Recently, however, there are always customers stating that the shipment delays of plastic raw materials have caused them trouble in production. This results in late delivery of goods and triggers a series of duplicate effects.
Let’s first look at how late delivery of goods will affect manufacturing enterprises:
Corporate benefits
When there is late delivery of one order, other production scheduling after that order will have to be adjusted. It will then induce costs like overtime pay. It will often also lead to a higher transportation cost, like switching from the originally planned ocean freight to air freight. To make matters worse, upstream buyers may reduce or cancel that order. The order quotas of succeeding seasons may drop.
Corporate Image
It may lead to a fall in customer rating, or even being sued for claims by buyers.
Above are some effects of late delivery on manufacturing enterprises. Tracing back the reason which leads to late delivery –we discover that it is the shipment delay of raw plastic materials. So what are its constituting factors?
Generally speaking, below are some of the factors:
The Chemical Plant
The chemical plant may be short of monomer raw materials and this affects the production of plastic raw materials. On the other hand, if the market price falls continuously, to avoid a heavier loss, the chemical plant may reduce its production by lowering the rate of operation. This will extend the production cycle.
The shipping company
During low seasons, the shipping company will reschedule the shipping timetable after considering transportation cost. The traffic volume of ships maybe affected. If there is a transportation restriction, the smaller traffic volume may delay the shipping schedule of goods after.
Weather
The production facilities of the chemical plant may be destroyed because of bad weather conditions like lightning and flooding and this may cause the plant fail to produce on time. Also transport is often affected during hazardous weather like rainstorms and typhoons.
Unexpected Incidents
Sometimes there may be damages tothe freightersduring navigation. The freighter willstop at a port and change from a direct route to an indirect route. Time will be wasted. Also individual social problems, like strike held by harbour workers, will also affect transport.
In the light of these irritable factors that may cause shipment delay, what kinds of precautionary measures should manufacturing enterprises take to avoid being too passive when delay occurs?
First, let us understand the steps of operation roughly at different phases:
Precautions in advance
Develop a sense of urgency. In reference to the products’performance requirement, one should discuss other brands as substitutive materialswith suppliers and upstream buyers. One can pay attention to several reputable suppliers as alternate procurement objects.
The materials used by the chemical plants corresponding to the brand adopted can be geographically diversified. They can be coming from Taiwan, Korea and Malaysia.
When the shipment date is approaching, pay close attention to weather and other conditions. Keep in close contact with suppliers. When production is going on well, one should exchange risk information with upstream buyers in advance.
Concurrent responses
Inform upstream buyers of the delay of raw materials ordered by the factory due to shipment delay. It will be better if there are proofs from a third party. One should work with suppliers to deploy responsive strategies.
Post-analysis
Define the inventory required by an order clearly. Formulate a reasonable purchasing plan. Raise the safety inventory of production.
Strengthen the crisis management programme. When problems come, the enterprise can take actions and make decisions subject to the first choice model, which is more beneficial to all.
Shipment delay is uncertain and its happening is of a certain probability. Based on uncertainty and probability, customers will then have an information exchange with suppliers and upstream buyers prior to their co-operation. Stay frank in communication is the best way to develop long term co-operation.
We will start with concrete examples of shipment delay to resolve the predicament in reality layer upon layer. By widening our horizons bit by bit, colleagues of Sunta can provide every customer with service in higher quality.
Appendix 2-Major plastic events
July 2 Taiwan’s refining firm CPC shut down its No.4 Cracker on July 2 due to obstruction. Only No.5 Cracker is in force in Taiwan. Ethylene production in Taiwan has fallen to less than 10%.
July 4 Tension grows in the Persian Gulf. WTI has accumulated a 13% rise in 3 days of transaction.
July 13 The No. 3 Alkene Cracker of the Formosa plastics group resumes work. The supply of steam, Ethylene and Propylene restores.
July 20 An explosion occurred in Bulgaria. The tension in the Middle East grows. The International Oil Price has risen for 7 days of transaction.
