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Arbitrage window open for PP from China to Southeast Asia

by Shibu Itty Kuttickal - sikuttickal@chemorbis.com
by Esra Ersöz - eersoz@chemorbis.com
  • 21/03/2022 (02:58)
China’s PP markets turned down this past week, mostly as a result of supply pressure amid renewed lockdowns. This appears to have opened an arbitrage window for exports to Southeast Asia, with the delta between the two markets growing to a-year-high. Although the premium Turkey carries over China is much wider, arbitrage is currently unworkable.

ChemOrbis Price Wizard shows a $205/ton difference currently between Southeast Asian and Chinese import prices for homo-polymer PP raffia. The spread between the two regions has been at its highest of about $200-225/ton since mid-February. This is also close to an all-time high of $235/ton back in early March 2021, suggesting more PP cargoes may find their way from China to Southeast Asia, unless port operations are hindered.

 homo PP –CIF– China– Southeast Asia– Import

“We have received a lot of import offers from China during the week. But Chinese PPH raffia offers have stayed around $1400/ton. This is not attractive enough for us and prices have to go down further,” said a trader in Vietnam. But he agreed the Chinese offers were among the lowest at the moment, compared to those from the Middle East and South Korea.

Ample supplies in China, shortfalls in SEA

Demand is not great in Southeast Asia but traders have noted domestic supply shortages as import arrivals to the region have been slowing down because of the acute container crunch in Asia.

Apart from adequate supplies and the oil market slump, Chinese PP market sentiment has also been hit by increasing numbers of COVID-19 infections. “Supplies have remained ample, while demand has stayed muted because of a rapid increase in prices. The COVID-19 spikes have also meant falling demand in the domestic market,” said a Chinese trader.

Chinese sellers focus on exports

“Shenzhen accounts for 11% of China’s GDP, while Jilin makes up about 11% of China’s annual car output in 2020. You can see how the latest COVID-19 situation in these two areas is affecting the market sentiment in the country,” he added.

Such a situation has forced Chinese traders to focus on exports, while pushing aside import PPH offers. “We may see more Chinese offers in the weeks ahead until the current slack in the market gets absorbed by domestic buyers, or by more exports to Southeast Asia and other regions,” another Vietnamese trader said.

May PP futures on the Dalian Commodity Exchange witnessed a weekly loss of CNY590/ton ($93/ton) during the week. According to ChemOrbis Price Index, the weekly average of import PPH raffia and injection prices in China shed by $15/ton while the loss was bigger at more than $50/ton in the domestic market. Meanwhile, China’s two major domestic producers’ combined PE and PP inventories stayed higher on a weekly basis, up by 75,000 tons from March 11, to stand at 990,000 tons as of March 18.

Port operations slow down

China’s ports remain operational despite the lockdowns; however, overall efficiency was expected to reduce due to stringent testing requirements in tracking operations and closed warehouses.

This may stem Chinese sellers from exporting less than desired, remarked some sources, despite the wide-open arbitrage window.

Traders see further Chinese PP slide

According to Chinese traders, PP prices in China have room for further decreases over the near term in the wake of weaker cost support amid the extreme volatility in the energy markets as well as supply pressure at home. Prices of feedstock propylene have fallen by more than 5% over the past week, tracking the losses made in the crude oil market.

“This could keep the arbitrage window open in the near term,” a trader in Vietnam added.

Freights make the arbitrage to Turkey unworkable

The gap between Turkey and China has also risen to around $500/ton recently, according to the weekly averages of ChemOrbis Import PPH Raffia and Injection Price Index.

Although the gap is much wider, the elevated freight rates of around $450-500 per ton from China to Turkey make the arbitrage unworkable.

Chinese PP cargoes have still been finding their way to Turkey and raising market share since 2021, but challenging freight rates remain an obstacle, keeping their size in check.
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