The plastic market should not be overly pessimistic

After the Spring Festival, plastic prices rose rapidly, but downstream acceptance of high priced raw materials weakened. Coupled with expectations of new production capacity deployment, plastics began a downward trend in mid March. As of June 15th, the main plastic contract fell below 7500 yuan/ton during trading. At present, plastic futures prices are maintaining a downward trend, but it is not advisable to be overly pessimistic.

High pressure on the supply side

As the maintenance equipment gradually restarted, the PE maintenance efforts began to rapidly weaken in mid May. According to data, as of June 16th, the proportion of PE maintenance capacity was 7.53%, which is at a moderate level in recent years and a decrease of 8.06 percentage points from the previous high point. By the end of June, Shanghai Petrochemical, Lianyungang Petrochemical, Yanchang middling coal and other PE units are planned to resume production. In the middle and late June, only one full density unit with an annual capacity of 220000 tons will be added to Maoming Petrochemical for maintenance. It is expected that PE maintenance efforts will continue to weaken in the later period.

On the other hand, the expected concentration of new production capacity has a more significant suppressive effect on the market. As of the end of May, the PE new facilities of Longyou Petrochemical, Huatai Shengfu, and Lianyungang Petrochemical have all been produced normally, with a total annual production capacity of 1.2 million tons. Multiple units including Shandong Shouguang Luqing Petrochemical, Tianjin Bohai Chemical, Sino Korean Petrochemical, Zhejiang Petrochemical Phase II, and PetroChina Changqing Ethylene Project are planned to be put into operation from June to August, with a total annual production capacity of 3.4 million tons. Although there is a possibility of a delay in the actual operation of the new device, such a large amount of production capacity is expected to still bring significant pressure to the September contract.

The demand side is temporarily weak

Since the beginning of this year, there have been no obvious highlights in the demand for plastics, especially during the downturn in the market. The downstream replenishment mentality has become more cautious, mainly focusing on rigid demand, which has strengthened the market's bearish view on plastics. From the perspective of downstream production, the operating rate of the agricultural film industry has declined to the seasonal bottom range, while the operating rate of other industries is mostly at a relatively low level during the same period in recent years. From a seasonal perspective, the start of agricultural film production in June will enter a bottoming out and recovery stage, and the operating rate of the pipe industry will enter a slow decline stage. It is expected that the actual demand for plastics will increase only slightly in June.

However, considering the high demand procurement of downstream plastic enterprises this year and the low inventory of raw materials, the profits of downstream enterprises have recovered after the decline in raw material prices. It is not ruled out that downstream enterprises will increase their replenishment efforts in the case of low plastic valuations. Before the Dragon Boat Festival, the speed of upstream destocking significantly increased, which to some extent confirms the increased enthusiasm of downstream restocking. As of June 11th, PE Petrochemical's inventory was 211000 tons, a decrease of 83000 tons compared to the previous week, a decrease of 28.2%. Comparatively speaking, the May Day holiday is longer, but the petrochemical inventory in the week before the holiday only decreased by 62200 tons compared to the previous week, indicating an increase in downstream replenishment efforts in the near future. In addition, there will be more promotional activities on various domestic e-commerce platforms in the second half of the year, and they will face the traditional "golden nine silver ten" peak season. For plastics with a wide range of uses, demand may be boosted to some extent.

There is support on the cost side

The prices of coal and crude oil have increased significantly this year. As of June 16th, Brent oil prices have exceeded $74 per barrel. Considering that the global vaccine is still in the process of rapid vaccination, the expectation of crude oil demand growth is optimistic, and the arrival of the peak summer driving season in the United States is also conducive to increasing crude oil demand. Coupled with the uncertainty of the specific time when Iranian crude oil will return to the market, it is expected that there will still be upward space in crude oil prices. In terms of coal prices, although there has been a rapid decline in domestic coal prices, coal supply is still tight, and the summer electricity peak period is approaching, with strong support below coal prices. The prices of raw materials have been operating strongly, while the prices of plastics have continued to decline. The theoretical production profits of various processes have been continuously compressed, and they are now near the level of the same period in recent years. Among them, the profit from coal production is equivalent to that when the plastic price was * * * last year. Low valuation may limit the short-term decline potential of plastics.

Overall, the expectation of supply growth remains an important factor in suppressing plastic prices, while demand is weak and raw material prices are strong. The game between supply growth and cost support continues, with plastic mainly experiencing oscillations in the short term.

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Reference: http://china.chemnet.com/ June 18, 2021 10:40:51 CITIC Securities Futures