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Insight | Time:Nov 21 2016 11:12AM
LLDPE starts risk-releasing drop
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LLDPE futures had been a rollercoaster in recent weeks, after steep increase, prices went deeply down this week, as the mostly traded contract 1701 dropped from Friday settlement of 10,275yuan/mt to a lowest of 9,500yuan/mt. It had been following the overall commodity prices’ trend, which slumped on Friday night, after series of restraining measures by the authorities on the overheated speculative market.

LLDPE futures 1701 had been rising since late Sep, from 8,500yuan/mt to above 10,600yuan/mt, up over 2,000yuan/mt or 23.5%. It was now in a middle between the peak and the bottom, 9,600yuan/mt. Technically speaking, despite this sharp change, market may fall further, as price has broken a downward psychological line.

The drop in LLDPE futures is reasonable. LLDPE market had been rising continuously since early Oct, though no significant changes were in fundamental side. The risks had built up high with price kept surging. This round of adjustment was just a start of the risk releasing.

What will take place in LLDPE futures and spot market in the coming days? Let’s look back on LLDPE market fundamentals.

First, LLDPE supply was sufficient or ample. Current PE operating rate was high around 90%, a yearly high rate after PE plants restarted from the turnarounds. And the production proportion of LLDPE was steady and high around 35-40%. In a long run, LLDPE supply would be sufficient to ample, especially low-grade LLDPE, as most coal-based PE producers were yielding LLDPE stably.

2. Demand for PE in Nov might by affected by downstream deficits. For the most dominating product, LLDPE, its downstream mulch film producers traditional peaked production in Nov and procured feedstock in the month. However, current high prices of LLDPE left downstream film makers in heavy deficits, especially for those who had presold orders. According to market survey, LLDPE’s largest buyers, mulch film makers, were mostly suffering losses, and that would affect market demand greatly in Nov.

3. Potential increase of low-grade LLDPE. Current LLDPE market was still around 10,000yuan/mt, and it was above many overseas sources. High-priced market attracted suppliers. In the past weeks, there were more and more imported LLDPE and LDPE offered into China RMB market, and those sources were mostly from Brazil, Iran, and Southeast Asia, and would continue arriving till end Dec. The low prices and heavy load would hit China LLDPE market fundamentals. Traders were actively offering at attractive low rates, and that was part of the reason dragging prices down.

Apart from LLDPE fundamentals, there were also some effect from other related products. LDPE market, in particular, had risen to an unprecedented height, was under great downward risks. Its high prices and gradually diminishing demand indicated great downward space. If LDPE started falling, the sentiment of whole PE trading would be affected.

In conclusion, LLDPE market is switching to a weaker stage and releasing risks accumulated in previous days. The bear side is taking an up hand, given LLDPE market fundamentals, external commodity prices, and related product’s performance. When LLDPE futures in Dalian Commodity Exchange breaks the 9,500yuan/mt line, it may approach around 9,200yuan/mt.
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