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Insight | Time:Apr 17 2017 4:16PM
LLDPE falls below supporting line, both shoes drop
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Since the slump in March 2017, LLDPE market had been in narrow range-bound for over a month. Both futures contract and coal-based spot prices were ranging from 9,000yuan/mt to 9,500yuan/mt, particularly plus or minus 100yuan/mt around 9,250yuan/mt.

On Apr 14, LLDPE prices plummeted significantly, and dropped below the psychological line. In the same day in Shandong province, coal-based LLDPE spot was traded at around 8,950yuan/mt, and major futures contract for LLDPE (1709) fell from above 9,000yuan/mt to as low as 8,740yuan/mt, even lower than the settlement before the National Day holiday in 2016 (8,800yuan/mt).

The significant fall in LLDPE futures and spot market is due to accumulated bearish pressures. Market bullish factors, including PE plant turnarounds, failed in the battle with the bears, as a result of quick price collapse.

What are the major bears hindering LLDPE market?
The direct hit was from diminishing seasonal demand from major downstream agricultural film. LLDPE is a seasonal product, as its major consumer, agricultural film makers are largely restricted by the shifts of seasons. The slack season of agricultural film in North China in 2017 came earlier compared with previous years, as farmers used less mulch film and green house film in the warmer winter in 2016-2017. The average temperature in many provinces reached a record high in the past decades. As a result, agricultural film production was largely shut in Apr, as most medium-small sized plants were completely shut down and large-sized plants switched to produce other films. Current run rate of film makers in North China was below 50%. New orders largely shrunk and demand for feedstock LLDPE also dropped at mean time.

Below chart shows the cash flow of agricultural film. Despite of declining LLDPE prices quicker price drop in film resulted in lower cash flow.

Apart from seasonal reason, demand for PE was also reduced by stricter environmental control in North China. As the authorities required higher standard for emissions and pollution control, local plastic market was largely curbed. In Linzi, Shandong, 243 plants were to shut down completely, including number of plastic products plants. In Xiong’an New Area, Hebei, numerous traditional plastic plants were required to remove out of this new district, which was newly established as part of measures to advance the coordinated development of the Beijing-Tianjin-Hebei region. This did not only reduced actual demand but arose worries in the industry, as they held the trend to be continued.

Furthermore, China’s banking regulatory grew harsher and macro-economic situation was harder. The upgrading banking regulatory in China put priority on trade arbitrage, institutional regulations recently, and the trends of deleverage of banks, tightening capital flows were deepening. Some analysts had predicted that the economic recovery had reached its periodic ceiling, and general outlook was bearish. All these were reflected in volatile fluctuations in commodity market recently, especially energy and chemicals market in China, as prices dropped across the board, with the decline still hard to be leashed. As a member of chemical products, LLDPE futures dropped continuously.
With the bearish influences, weakness of PE was reflected in the long-lasting high stocks. Total petrochemical plastic stocks lingered around 900kt, ahead of the slack season for the industry. Port inventory of PE also stayed relatively high. There was rumor about Mar PE imports, reaching a historical high of around 1.10 million tons, a big hit on weak PE market if it was true.

All these bearish factors considered, LLDPE market fundamental is under heavy bears, and external environment is no longer supportive. All the bearish expectations have come to reality, and drag down LLDPE prices below its previous psychological low. In the late market, PE market may still be curbed by the above mentioned influences, and spot market may go further below 9,000yuan/mt to search a new supporting line around 8,500yuan/mt.
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