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Insight | Time: May 30 2018 4:15PM
Will LLDPE get out of the 9000-9400 zone
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LLDPE futures contract L1809 closed at 9225 for two consecutive days on May 24th and 25th, setting almost exactly in the middle of the range of 9000-9400yuan/mt, which dwelled LLDPE futures and spot for nearly two months since early March to early May. The short-term breakthrough in May only touched 9500-9600yuan/mt and did not go too far. LLDPE market is now faced with a concussive pattern, and its momentum of breaking it is very weak.

Viewing the demand for LLDPE, consumption of plastic film has entered off-season entering May. And the profitability of the plastic film plants is also kept at a relatively low position, so their intention to build up feedstock inventory is low. Though there is newly increased demand in May and June, from sectors including irrigation pipes in North China, it does not account too much in the total volume. As a result, the market demand is stable and tranquil. Weak demand will be a major obstacle for LLDPE to break out of the interval.

Looking at the supply, increasing number of PE plants are to be closed for turnaround in May and June, including large number of LLDPE-related devices. There is a significant reduction in LLDPE supply. In addition, the HDPE/LLDPE swing plants prefer production of HDPE for higher profit, and thus cut their contribution of LLDPE at the same time.

Company Plant Capacity (kt/year) Turnaround & production switch
PetroChina Sichuan PC LLDPE/HDPE 600 shut on Apr 8 for 60 days
Sinopec Zhenhai (ZRCC) LLDPE 450 shut on Apr 27 for 50 days
PetroChina Jilin PC LLDPE/HDPE 575 shut on May 8 for 30 days
Shenyang Chemical LLDPE 100 shut on May 3 for 50 days
Sinopec Zhongyuan PC LLDPE 260 shut on May 10 for 14 days
Pucheng Clean Energy LLDPE/HDPE 300 shut on May 7 for 8 days
ChinaCoal Shaanxi Yulin LLDPE/HDPE 300 switched to HDPE in May
Shaanxi Yanchang LLDPE/HDPE 600 switched to HDPE for long term
Zhongtian Hechuang LLDPE 300 shut on May 25 for 11 days
Ningxia Baofeng Energy FDPE 300 shut on Jun 10 for 30 days

Above table shows major LLDPE plant operation issues during April to June, and operation hiccups frequently took place at the end of April to early May, when market speculation reached a climax, temporarily driving LLDPE above the upper limit of the 9,000-9400yuan/mt range.

But since late May, LLDPE plants gradually recover, and the low-end imported LLDPE entered domestic market and defined a lower limit of the price, stabilizing the supply at meantime. So LLDPE is pulled back to 9,000-9,400yuan/mt zone, making everyone realize that the market has a high degree of recognition for LLDPE in this price range. In this case, it requires stronger boost to break the range, and with current supply and demand status, it is very difficult.

But there are outside influences working on the market as well.

First of all, to break through upwards. At present, the biggest driving force is the devaluation of the renminbi, which boosts the overall atmosphere of the commodity market into a strong pattern. In addition, it is the crude oil market that shoulders up the cost of oil-based commodities. Brent crude is currently close to $80/bbl, giving LLDPE bulls with more confidence. In May and June, domestic LLDPE supply will not be surplus. If the depreciation of the RMB causes the cost of imported LLDPE to rise, or if crude oil remains strong, triggering market speculation, it may lead to a stronger LLDPE market.

Secondly, to fall below the break. It is most possible when the relevant species leads to the downturn. The most relevant species to LLDPE is LDPE, because there is more overlap between the use of LLDPE and LDPE, and there is a strong substitution effect in practical use. The price fluctuations of the two materials affect the downstream distribution in real time. Currently, the price of low-end imported LDPE is already around 9000yuan/mt and could be still lower, and domestic coal chemical LDPE is near 9300yuan/mt. In the insight report on May 28, we talked about the possibility of further decline in LDPE, with its heavy stocks, rising domestic supply and large import arrivals. LDPE is already lower in price than LLDPE, and when LLDPE falls below 9,000yuan/mt, it is expected to drag LLDPE prices to a lower position.

In general, the current supply and demand pattern of LLDPE is still relatively balanced. After a brief breakthrough, the return to the 9,000-9,400yuan/mt zone is the proof of market equilibrium. From the perspective of LLDPE itself, the momentum of its breakout range is not strong, but many factors beyond the fundamentals will increase the probability of the LLDPE market breaking the concussive range. Whether or not will LLDPE break the zone, the decisive power lays in external factors.
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