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Insight | Time:Jun 19 2017 4:29PM
Why imported LLDPE falls despite narrower spread with RMB sources
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Imported LLDPE has been weak for almost all the past 6 months. Prices extended decrease except a mild rebound around the Chinese Lunar New Year holiday. Price dropped by 8% from a ceiling of $1,190mt after the Chinese Lunar New Year holiday to $1,095/mt CFR China, while price of domestic LLDPE lowered to the bottom of 8,850yuan/mt in early May and then rebounded to 9,350yuan/mt. Traders are still worrying over the late market of imported LLDPE, based on the lukewarm transaction.

Price spread between imported and China domestic LLDPE sources is narrowing down (in above chart). China domestic LLDPE price has been rising since early May, as domestic supply tightens evidently when couple of LLDPE production facilities are shut for turnarounds. The supply shortage is particularly evident in East China market. But imported sources have been weak for long term. If calculated the RMB cost of imported LLDPE, price spread between the two has been reduced to around 100yuan/mt in mid Jun, as the rate usually to be 800-1,000yuan/mt this year.

In a normal trading logic, transaction of imported LLDPE would have increased with narrower price spread, but the fact does not apply to it, and downstream demand for imported LLDPE or the whole imported PE sources remain lukewarm. What hinders end users’ demand?

First, formula price and new offers from overseas suppliers trend down.

The above chart shows lasting downward trend of formula settlement arrival price of LLDPE over one year, despite flicking weak rebounds. In addition, overseas suppliers have been reducing their offering rates continuously, especially those form Thailand and Qatar, whose offers go apparently lower. Lower formula price and suppliers’ offering rates mean a cheaper cost for traders, and reasonably lower offers to Chinese end users.

Second, largely arrived low-price sources pressure on the market.
In 2017, the proportion by PE import origins is gradually shifting, as volumes from producing markets like Iran, Brazil, Indian and U.S. enlarge, though China’s traditional suppliers, Saudi Arab, UAE, Singapore and Thailand, keep a total above 50% share. Dividing these sources by price range, Brazil, Indian and U.S.’s sources are in the low end, and Iran’s in the medium-to-low part, rest in medium-to-high.

There is one phenomenon in Chinese imported PE market, medium-high-grade imported cargoes have been fixed with downstream plants, or they are traded after customs clearance via “ordinary trade” in RMB form, instead of openly offered in the USD market via “processing with imported materials” or “processing and assembling with customer's materials”. The major sources circulating in USD market are mainly medium-low-grade sources.

The price spread between low and high grade imported PE could be around $50-100/mt. For instance, current prevailing offers of Saudi Arab, Qatar origin LLDPE are at $1,100/mt CFR, while that from Brazil and Indian are around $1,000/mt CFR or even lower. Rumors about Iran’s super-low price LLDPE bought by Chinese traders in tens of thousands LLDPE during the Chinaplas, and so far there are still quantity of stocks remaining at the ports. That is basically why the USD LLDPE market remains weak.

Last but not the least, demand from downstream medium-small-sized plant is lackluster.
The traditional slack season of May-Jul is particular sluggish in 2017, because of upgrading environmental protection standards in China. The EP wind not only restricts downstream plants’ production activities but also affects import and export manual, and in the end substantially curb end users’ demand for imported PE. Buyers take on a more cautious attitude than before and tend to purchase only in small quantity. The condition is better in large-sized plants, as their order taking is still sustainable, while medium-small-sized plants suffer difficulties to maintain a normal cash flow and operation.

All the above mentioned factors come to this, LLDPE CFR China prices may keep weak in the traditional slack season with lower cost, low-price sources’ hit and shrinking rigid demand, even though the spread between domestic sources narrow down.
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