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Insight | Time:Jan 30 2018 2:43PM
Commodity-grade PP supply to rise toward Chinese Lunar New Year holiday
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With the Chinese Lunar New Year holiday coming near, domestic PP market finds both buy and sell mood thinning down, especially non-commodity-grade PP products. The commodity-grade PP, homo PP raffia grade, is waving in line with futures contract, while the spot-futures basis turns deeper below zero, indicating a weaker spot market performance before the holiday.

The below two charts show evident narrow-down in the spread between commodity-grade PP and non-commodity-grade products. Price spread between homo PP raffia and injection grades improved from around -500yuan/mt in Nov 2017 to above -100yuan/mt in Jan 2018, and that between homo PP raffia and co-polymer PP rose from below -500yuan/mt in Oct 2017 to around -300yuan/mt in Jan 2018.

In other words, the trend of commodity-grade PP is firmer than non-commodity-grade, as the latter one loses momentum more quickly before the holiday.

The reducing momentum in all PP grades in Jan 2018 is mainly due to slowing demand before the holiday, which is typically 12 days starting mid-Feb. In addition, downstream thinner sales and environmental protection campaign in winter time drags demand further down.

The negative impacts are larger on non-commodity products, while commodity-grade homo PP raffia is still supported by market speculative force. As for homo PP injection and co-polymer PP, the support from futures exchange is much less. Therefore, the premium over homo PP raffia reduces.

The mentioned trend is irreversible before the holiday, and some PP producers consider the condition and have switched or plan to switch production to commodity-grade PP. For instance, ChinaCoal Mengda and ChinaCoal Shaanxi Yulin have already stopped production of homo injection grades PP V30G and Z30S to homo PP raffia. As a result, raffia-grade PP production is pushed up high.

Among all grades of PP production, homo PP raffia’s proportion is ramping up since Dec 2017. Production during the Chinese Lunar New Year holiday is expected to be steady, and easily cause piling stocks when demand is diminished.

Extra production during 2018 Chinese Lunar New Year holiday compared with 2017
Plant Capacity (kt/year) Operating rate Daily production (mt) Stock piling in holiday (12 days, mt)
Datang Duolun 1# 230 100% 0.07 0.8
Datang Duolun 2# 230 100% 0.07 0.8
Zhongjiang Petrochemical 350 115% 0.12 1.5
Zhongtian Hechuang 2# 350 90% 0.09 1.1
Shenhua Ningxia Coal Industry II 1# 300 80% 0.07 0.9
Shenhua Ningxia Coal Industry II 2# 300 80% 0.07 0.9
Qinghai Yanhu 160 80% 0.04 0.5
Yuntianhua 150 80% 0.04 0.4
Total stocks: 6.9

Above table lists the new plants started up in 2017 and their estimated production during the holiday, and Datang Duolun has been suspended for a long term including the Chinese Lunar New Year holiday in 2017, while restarted late in the year and would continue running in 2018. There is around 70kt extra stocks piled up during this year’s Spring Festival holiday.

Based on the existing PP plant operating condition and planned turnarounds in Spring time, we make an chart of monthly production growth compared with the same period of last year, and domestic PP production growth on the year is expected to reach a new peak in 2018, and may have a large chance to stay the highest monthly growth rate in the year. Given the fact that the Chinese Lunar New Year holiday may possibly end in late Feb, closing to Mar, extra stock piling during the holiday and the high year-on-year growing supply may cause large pressure on the market in Mar.
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