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Insight | Time:Jul 17 2017 4:36PM
LLDPE still awaits a chance to rise
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Recent China domestic energy and chemical commodities had been in a bullish trend. Being one of them, LLDPE market steadily climbed up. After consolidating in the range of 8,800-9,000yuan/mt for a week, LLDPE futures contract for Sep stood up to above 9,200yuan/mt in the past week. LLDPE spot market also strengthened, with coal-based LLDPE in North China (region close to Dalian Commodity Exchange) rising from 8,900yuan/mt to 9,000yuan/mt.

The increase process in Jun-Jul was fueled up by bullish commodity market, and LLDPE futures rose evidently more than spot market. Spot-futures basis gradually turned negative to below -100yuan/mt.

Will LLDPE spot and futures market sustain the increase in late market?

If we assess current LLDPE market fundamentals, supportive factors are getting stronger.
First, LLDPE production activities are still in control. YCP (200kta LLDPE) and PetroChina Fushun PC (450kta LLDPE) are still closed in turnaround, ChinaCoal Mengda has just restarted its 300kta HDPE/LLDPE swing plant for LLDPE 7042 on Jul 15. In short, market supply is restoring but not glut. In addition, LLDPE production proportion has reduced and stabilized around 35% since May 2017, and with this rate kept, there will not be oversupplied LLDPE.

Second, LLDPE supply in China is still contained low. In Jun and Jul, China domestic LLDPE production is largely reduced due to intensive turnarounds, and imported cargoes meet difficulties in coming in, as domestic prices are comparatively low. Both import and domestic production are lowering in the first half of 2017 (as can be seen in below chart). This is proven by LLDPE stock levels in China. According to petrochemical plants, coal-chemical producers and other market players, LLDPE stocks are rather low presently. Even total PP and PE stocks are cut to around 600kt by mid-Jul. Low stock give confidence to many bull speculators.

Furthermore, recycled LLDPE production has been restricted by environmental inspection in North China. Due to easier pollution and larger emission of recycled LLDPE production, this part of supply is largely cured in 2017, as authorities take overall inspection and control in industrial production which may affect the environment. This factor is not yet notable as demand for LLDPE remains in a slack season yet, but in a longer run, higher production cost for recycled LLDPE will also be a support for low-grade LLDPE market.

However, LLDPE market still awaits something to embrace its chance of increase.

Over the second quarter of 2017, PE demand is described as lukewarm, and the delayed slack season in downstream is a major reason curbing market from rising up. In the third quarter of 2017, the slack season is expected to end gradually and downstream rigid demand is about to restore. Still, this process could be slow due to many restrictions, including EP regulations and so on.

All in all, bearish force in LLDPE market has been weakened, with supportive or bullish influences expanding at the same time. If downstream demand shows a sign of recovering, market is very likely to be fueled up.
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