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Insight | Time: Mar 31 2020 3:48PM
Historically low LLDPE still at risks
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With the continuous spread of the coronavirus pandemic, the whole world has entered a major economic crisis. As an old saying goes like this, misfortunes never come singly, the OPEC+ countries have started a crude oil price war in March. For the LLDPE market, the coronavirus pandemic encounters a fierce crude oil price war, which results in a sharply lower LLDPE upstream cost and an unprecedented contraction in downstream demand. Under the attack, LLDPE futures falls below 5300yuan/mt and spot have dropped to around 5500yuan/mt---an absolute low level that no one in the market has ever seen before.

Unfortunately, however, such low-price also occur in other chemical markets, such as ethylene, PTA, MEG, etc., and these products all struggling in their own historical lows. Under the influence of crude oil, the market of downstream products is difficult to hit bottom, and there is still a driving force and space for further decline.

For LLDPE, both supply and demand side are bearish. On the supply side, as crude oil price weakens, cost of petrochemical plants moves lower. Moreover, inventories of petrochemical plants and traders are high. In this case, market participators all expect that the cost side could support the market from further declining. But in fact, in the short term, LLDPE cost may continue to drop before the crude oil hit bottom. At present, the price of WTI and Brent is close to $20/barrel, and the price of naphtha is around 200dollar/mt, and the related LLDPE cost can be declined to below 5000yuan/mt. In other words, there is still room for petrochemical LLDPE to decline in terms of cost. What's more, the $20/barrel crude oil may also continue to fall, and thus LLDPE may face a further decline.

On the demand side, the world is currently affected by the coronavirus pandemic, major economies have implemented a variety of emergency laws. People's work and life are not in a normal state and income declines, resulting in a substantial decline in demand for PE downstream products. In China, a large amount of foreign trade orders have been cancelled, and it is obviously that the contraction in demand is coming rapidly.

In terms of time, the U.S. President Trump has announced that the re-opened time for the United States will be postponed from April 12 to April 30, and there is no clear time for Europe to return to normal. It is clear that the major economies such as Europe and the United States will not be able to fully return to normal before end-April. China's export demand for LLDPE-related end-products still has room for further contraction. If the inventory of end-products accumulates, it will inevitably lead to heavier pressure on the supply side, and then market may decline further.

To sum up, LLDPE market is now in such a frightening atmosphere at the end of the first quarter of 2020. In the second quarter, judging from the current situation, the fundamentals of the LLDPE market are still likely to deteriorate further in the initial stage. Whether it can be improved depends on the control of the global coronavirus pandemic and the improvement in the international oil market. At present, the downward trend of the LLDPE market is in the most rapid stage, and the downward space would be smaller and smaller even if market price weakens again, and the market may rebound in the near future. Traders are suggested to procure at low-price.
[RISK DISCLAIMER] All opinions, news, analysis, prices or other information contained on this report is provided by analyst of Zhejiang Huarui Information Consulting Co., Ltd (CCFGroup) as general market commentary and does not constitute investment advice. CCFGroup will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
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