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Insight | Time: Sep 29 2018 2:43PM
LLDPE market close to upside limit
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Since the second half of September, LLDPE market has finally performed strongly in line with the traditional peak season of “Silver September and Gold October”. The major futures contract L1901 gradually rose from around 9,300yuan/mt in the middle of September to around 9,600yuan/mt in late of the month. Notably, the related spot performance is even slightly stronger than the futures, especially in North China, both coal-based and oil-based LLDPE gain small premium over the futures.

A strong market appears on the base of bettering supply and demand at the same time.
From the perspective of demand, consumption from agricultural film plants in North China has begun to increase in mid-September, as there are rising new orders for both greenhouse film and plastic film and the agricultural film plants had largely raised up their operating rate. Film plants come into PE market to stock up, resulting in a shortage of raw material market supply and a continuous price rise.

On the supply side, domestic production of LLDPE has reduced over August-September, as major LLDPE plants including PetroChina Daqing, Shenhua Baotou, Shenhua Ningxia have shut production for annual turnarounds and some HDPE/LLDPE swing plants have switched production to HDPE (Shaanxi Yanchang, Ningxia Baofeng, Pucheng Clean Energy).

Booming demand against reducing supply has prompted domestic LLDPE market evidently in H2 September.

However, the bullish effects are gradually wearing out after lasting increase in LLDPE futures and spot. And at the time, supply-demand structure of LLDPE is gradually changing.

First, still from the perspective of demand, after continuous increase, the price of LLDPE in North China is basically between 9,600-9,700yuan/mt, and the profit of downstream agricultural film is gradually squeezed down. In August 2018, the average film profit is assessed around 107yuan/mt, while is reduced to 83yuan/mt in September, especially of late September the margin is almost zero. Based on market survey, when the average price of the LLDPE market is above 9,700yuan/mt, the mainstream agricultural film plants will lose profit, and only several large enterprises can sustain normal production activities.

At present, the average price of domestic LLDPE in North China is around 9,600yuan/mt, close to the lien of 9,700yuan/mt, and it is reasonable to see demand suppressed, even it is in the peak sales season. As a result, the uptrend in LLDPE market is restrained.

Second, from the perspective of supply, PetroChina Daqing Petrochemical has already started production in mid-September, and will continue to increase supply in late September; coal-chemical producers Shenhua Baotou and Shenhua Ningxia have scheduled to start in late September or early October, and will be running at full rate after the National Day; HDPE/LLDPE swing plants Ningxia Baofeng, Pucheng Clean Energy and Shaanxi Yanchang have recently been switched production to LLDPE, or will soon be switched to LLDPE. Many of the above devices are potential drivers for the increase in LLDPE supply, which will stop supply crunch of domestic LLDPE and limit the market's upside ceiling.

Plant Production Capacity (kt/year) Close date Restart date
PetroChina Daqing LLDPE 80 12-Jul 18-Sep
PetroChina Daqing PC HDPE/LLDPE 300 18-Jul 10-Sep
PetroChina Daqing PC HDPE/LLDPE 2# 300 1-Aug 10-Sep
Shenhua Ningxia HDPE/LLDPE 450 7-Aug 10-Sep
Shenhua Baotou HDPE/LLDPE 300 3-Sep 1-Oct
Shaanxi Yanchang HDPE/LLDPE 300 switch to HDPE since Aug 28 till now
Ningxia Baofeng HDPE/LLDPE 300 produce HDPE during Jul 15-Sep 6, switch to LLDPE since Sep 10
Pucheng Clean Energy HDPE/LLDPE 300 switch to HDPE since Sep 13

In addition to domestic supply and demand, when domestic LLDPE prices rise significantly, the import window will be opened more widely, resulting in more LLDPE flows to China. Take the LLDPE in Iran and India as an example. The recent USD offers are slightly below $1,100/mt, equating to RMB price (after-tax) around 9,300-9,400yuan/mt. Comparing with current domestic price level, the profit margin of imported goods is considerable, which will definitely lead to an increase in LLDPE imports.

In summary, LLDPE market has risen up greatly on supply crunch and seasonal demand, while it is coming close to a ceiling with risks building up toward late market. Rising supply and uncertain consuming persistence in consuming power may limit market upward space, as it is hard to project a similar optimistic situation like that in the second half of September.

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