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Insight | Time:Jan 31 2018 3:44PM
PP CFR China rallies on strengthening RMB exchange value
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The Chinese yuan has gained strength against the US dollar since the second half of 2017 thanks to steady domestic economic growth, and the USD/CNY exchange rate has quickly lowered in 2018 from 6.6 to 6.4, almost hitting a lowest rate since Sep 2015.

The steep change in forex market has a huge impact on the bulk commodities relating to USD defray, as the change directly lowers down import cost based on dollar.

For PP market, the influence is even bigger, as when import cost declines with lower USD/CNY exchange rate, domestic prices elevate.

Entering Jan 2018, China domestic polypropylene prices have spiralled up from 9,000yuan/mt to 9,400yuan/mt, and keep consolidating around the place in late of the month. Price of dollar based PP CFR China has also hiked up, as the USD sources are limited and forex movement allows more space for the lift. The increments in domestic and import market are different.

Despite of a flattening trend in domestic PP market, quickly rising USD rates are still within a reasonable range, when forex changes offset all these possible conflicts.

Demand for imported PP is mainly from downstream plants who process with imported raw materials and export finished goods. Within a certain range of price spread, it is favorable for them to purchase imported sources rather than domestic goods. Furthermore, there is another kind of buyers in CFR China market, they are traders who secure low-rate commodity-grade sources from the import market and go hedging with forward futures exchange. For this kind of hedging, there is a growing speed at which low-end USD sources are consumed. Apart from that, as price spread between import and domestic sources has narrowed down in the third and further quarters of 2017, downstream plants, who purchased China-made bonded cargoes, had turned back to source imported ones, and the re-export volumes also reduced. Therefore, the actual imported PP volumes was rising.

Viewing imports of homo PP in 2016-2017, the volume shifts also reflected domestic-import PP price spread changes, considering around 1-2 months period on the sea. Volumes from South Korea, Saudi Arab, UAE and India are mainly affected, while imports from Singapore mainly kept steady.

Given all the factors mentioned above, the decisive factor on PP import volume is price spread between domestic and import market, which shiver with changing supply-demand structure in China and abroad. Forex factor is just a temporary trigger, and in a medium-to-long run, market shall return to the fundamentals.
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