China’s domestic PP, PE markets extend gains on Dalian rally despite rising stocks, muted demand recovery

China’s domestic PP and PE markets started the new week on a firmer footing, supported by another strong rise in Dalian futures and higher crude oil prices. However, the gains came against a backdrop of a notable increase in domestic polyolefin inventories, while the expected seasonal recovery in downstream demand has yet to gain meaningful momentum.

September LLDPE and PP futures on the Dalian Commodity Exchange settled CNY190/ton ($28/ton) and CNY167/ton ($25/ton) higher, respectively, on Monday. This marked the seventh consecutive trading session of gains for both contracts since August 7.

Dalian rally provides strong support

The continued strength in Dalian futures has become the main driver behind the firmer sentiment in the domestic polyolefin market. A Chinese trader attributed the latest price increases to the rise in futures compared with last week, while also pointing to the People’s Bank of China’s recent CNY1 trillion ($147 billion) liquidity operation as a factor supporting market sentiment.

The PBOC announced on Friday that it would conduct a CNY1 trillion six-month outright reverse repo operation, effectively rolling over funds maturing in August and maintaining ample liquidity in the banking system. The move has provided additional support to broader market sentiment.

Higher crude oil prices have also reinforced cost support. A Chinese PE producer’s source said local prices had risen alongside futures and crude compared with last week. LDPE film prices were reported to have increased by around CNY400/ton ($59/ton) from the previous week, while LLDPE film and HDPE film prices were up by approximately CNY150/ton ($22/ton) and CNY300/ton ($45/ton), respectively.

A PP trader similarly reported that domestic PP prices had risen by around CNY150/ton ($22/ton) on the week, although the source stressed that downstream demand continued to pose significant pressure.

Inventory build-up puts a cap on optimism

The sharp rise in futures and domestic prices has not been accompanied by a corresponding improvement in physical market fundamentals. The combined polyolefin inventory held by China’s two major producers stood at 710,000 tons on August 17, up 100,000 tons from the previous working day, indicating a substantial accumulation over the weekend.

The inventory build-up is particularly notable given that the market is approaching the traditionally stronger “Golden September - Silver October” demand period. Instead of seeing a clear acceleration in destocking ahead of the peak season, stocks have increased sharply, reinforcing concerns over the strength of underlying consumption.

Market participants continue to report cautious buying interest, with no clear signs of a broad-based seasonal recovery. A Chinese trader said downstream demand had yet to show a meaningful seasonal improvement, with no clear signs of an approaching peak season. The source noted that buyers were currently favoring domestic material over imports because of lower prices and reduced purchasing risks, but added that this had not translated into a broad-based recovery in demand.

A source from a Chinese PP producer likewise said demand had yet to gain momentum, noting that new orders remained insufficient and buyers were largely purchasing only to meet basic requirements. The source added that inquiries were limited, deal activity was low and overall purchasing intention remained weak.

Supply remains relatively tight, but destocking is slow

Supply-side conditions are providing some support to the market and preventing the inventory build-up from translating immediately into stronger downward pressure.

The source from the PP producer pointed to a recent increase in unit maintenance and said industry operating rates remained at low to moderate levels. The source also noted that supply remained relatively tight, although the pace of destocking across upstream and midstream inventories remained slow.

This creates a mixed fundamental picture: lower operating rates and maintenance-related disruptions are lending support to sellers, while the lack of a clear demand recovery is limiting the market’s ability to absorb available material.

For PE, the supply picture also appears sufficiently supportive to underpin current prices. However, with downstream demand still described as weak, the recent price increases are being driven more by upstream and futures-related factors than by a fundamental improvement in consumption.

Rally faces a demand test

The latest price gains therefore appear increasingly dependent on the persistence of futures and cost support rather than a decisive recovery in downstream demand. A PP trader noted that overseas demand has also remained relatively weak and said some bearish market participants had resumed selling into the rally, highlighting resistance to higher price levels.

At the same time, the unresolved situation around the Strait of Hormuz continues to keep crude oil prices elevated and provides an additional layer of cost support. A Chinese trader expects oil prices to remain generally strong as long as uncertainty persists, forecasting that the domestic PP market could remain flat to slightly higher in the near term.