By: Saravanan Vaithi --
01 January, 2017
China producer prices index (PPI) has witnessed a decline for 46 consecutive months signalling the problem of overcapacity and slow off-take in most of the core-manufacturing sectors. The drop in consumer price index (CPI) also signalled weak trend in China and export market demand. Commodity plastics segment, primarily PE, PP, PVC, PET and PS markets have also been facing challenges in China.
Increase in per capita consumption, industry-friendly policies and the advent of costcompetitive feedstock supported the steady trend in domestic production during the start of this decade. Increased use of commodity polymers across all major core industries such as consumer care, construction and automobile have also resulted in high correlation between China’s economy and the growth rate of commodity plastic industry.
Customarily, demand growth for most of these plastics and capacity expansion plans were evaluated based on 1.5x of GDP expectations. The recent slowdown has, however, altered the math for previous estimates. For instance, PVC, PET and PS producers have undergone capacity additions expecting steady demand.
On the contrary, the market is now facing a glut. PP may also follow the ensemble due to increased propylene supply and proposed expansion plans. However, on-going devaluation and feedstock advantage (i.e. coal-based olefins) may support these polymer producers to explore export opportunities.
The presence of active futures market in few commodity polymer segments in China is likely to support domestic buyers in price discovery mechanism and in booking contracts to meet their future demand. Moreover, the buyers will also be aware of their offer price/spend value while entering the futures contract.
Entering futures contract is expected to ensure steady supply of material and may have better visibility on resin spend. The strong linkage between commodity polymers has resulted in high correlation between their prices. This is expected to support hedging of non-listed commodities such as HDPE, LDPE, PET and GPPS using futures contract of PP, LLDPE. However, this requires high precision in evaluation of hedge ratio.
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