Cost support fades: Are Asian PP, PE markets on the verge of free-fall?

The Asian polyolefin markets are at a critical juncture as the robust cost support that has long buoyed prices now appears to be waning. A key indicator of this shift is the notable plunge in crude oil prices, as Brent hit as low as $84/barrel and WTI $82/bbl on October 5.

Bubble burst in oil markets

Initiated in early July when Brent crude oil was around $75/barrel, the rally saw futures climbing to nearly $96.55/bbl on September 27, reaching an almost one-year peak. The production cutbacks, mainly from Saudi Arabia and Russia, and the expected shortfall in global supplies were the main trigger behind the climb in oil prices. There were also widespread bets that reaching a $100/bbl threshold was just a matter of time.

However, those speculations have not proven true. Rather, the momentum has waned since then with futures losing more than $10/bbl in just five days. The last two days saw the steepest drop since May in combined percentage for both benchmarks, because long positions established in anticipation of $100/bbl were liquidated.

The announcements from Saudi Arabia and Russia that voluntary production cuts would remain in place through the end of the year did not help much to stop crude’s tumble, since worries about the effect of elevated interest rates on the global economy have been far exceeding supply concerns.

Asian olefins remain intact – For now

Although spot olefin prices in Asia have largely held onto the highest levels since around May, both ethylene and propylene are likely to encounter pressure if crude oil futures fail to recover from its latest plunge.

PP and PE rally has already faltered in Southeast Asia

The bullish polyolefin sentiment across Asia had already started to waver even prior to the recent plunge in crude oil prices.

Both PP and PE prices in China and Southeast Asia reached around six-month highs by mid-September after staying on an uptrend for three to four months primarily due to high upstream costs. A pickup in demand amidst the peak buying season contributed to the rise of the markets.

Import prices in China were largely stable amid a dull trading atmosphere during the week prior to the Mid-Autumn and Golden Week holidays, while the domestic PP market underwent a slight downturn in the face of falling futures. Before leaving their desks, players commented that they expected a return from the holidays with prices stabilizing or slightly softening, reflecting a pullback in demand and supply pressure. “The price uptrend has been ongoing for the last three to four months and may be due for a pause or slight downward adjustments,” some concurred.

In the meantime, Southeast Asia’s import markets have already seen some downward corrections for the past two weeks in the face of mounting buyer resistance amid persistently subdued end-product demand. In Vietnam, for instance, import PE prices have softened since last week, with a key player saying, “Buyers prefer to wait until the Chinese holiday is over. They anticipate that prices may further decrease, so there is no rush to replenish. Meanwhile, the demand for end products remains weak”.

What will be left to prop up the markets if cost support is gone?

The surge in oil prices played a significant role in propelling the polyolefin markets in Asia on an upward trajectory.

If crude oil prices fail to recover from their recent decline, the upward momentum of PP and PE will be left even more vulnerable, especially considering that the supply and demand dynamics are still unfavorable.

Demand continues to disappoint

While demand for polyolefins saw a temporary uptick during the peak buying season of Golden September and Silver October, concerns persist regarding a fundamental recovery.

Despite China’s efforts to stimulate economic growth through various policies, the aftermath of the COVID-19 pandemic has cast a shadow on global polymer demand. Certain sectors crucial for polymer consumption, such as automotive and construction, exhibit hesitant recovery, contributing to overall insufficient demand.

China, facing slow growth, youth unemployment, low foreign investment, weak exports, and a property sector in crisis, has implemented extensive stimulus measures to revitalize domestic consumption and support its industrial sectors. However, the effectiveness of these initiatives is challenged by Western markets grappling with economic contractions and concerns of a recession. Structural weaknesses in polymer demand emerge as Western markets implement measures to control inflation through interest rate hikes.

Supply pressure is looming

On the supply front, even though several polyolefin plants in Asia continue to be run at reduced rates amid weaker margins, supply is not likely to be an issue during the fourth quarter. Additionally, there is still looming pressure due to startup schedules in China, particularly for PP. The combined polyolefin levels of the two major local producers are anticipated to be noticeably higher next week, considering the accumulation during the week-long break.

Across Southeast Asia, overall supply was considered relatively limited in September, especially for LDPE and HDPE, amid some shutdowns. In October, however, most of those plants are set to be restarted. Vietnam’s Long Son is expected to ramp up commercial production at its 500,000 tons/year LLDPE, 500,000 tons/year HDPE, and 400,000 tons/year PP units from mid-October, meanwhile.