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Polymer prices in China face pressure from high input costs and Covid-induced lockdowns

On Wednesday, March 23, 2022 at 04:07 IST

A sustained rise in new coronavirus (Covid) cases and resultant lockdowns in industrial towns have started posing a threat thereby giving rise to possible production disruptions at major petrochemical plants in China.

As evident from the price movement of major polymers currently being traded at the benchmark Dalian Commodity Exchange (DCE), consumers in the downstream industry in China have started booking for delivery in the future to ensure raw material supply for operating their factories smoothly. Since the number of new Covid-19 cases accelerated so far this month and worsened in the last one week, the prices of most polymers have risen by over 3 percent.

On the DCE, linear low-density polyethylene (LLDPE) opening price contract for near month delivery jumped by 1.71 percent or Yuan 150 from March 17, 2022, to Yuan 8,916 a tonne on Wednesday. Similarly, the price quote of polypropylene (PP) jumped by 2.36 percent or Yuan 203 since March 17 to trade on Wednesday at Yuan 8,820 a tonne. The opening quote of polyvinyl chloride (PVC) rose by 3.66 percent or Yuan 320 to trade on Wednesday at Yuan 9050 a tonne. Along with polymers, prices of raw materials like mono-ethylene glycol (MEG) have also risen by 1.95 percent or Yuan 99 for the near month delivery to trade on Wednesday at Yuan 5,168 a tonne.

In addition to futures, prices of key polymers have begun to firm up in spot markets as well. Between March 17 and 22, prices of all major polymers have jumped by 2-3 percent due primarily to disruption in supply from the production units to consumption centers on account of lockdowns.

“China has adopted a ‘zero-tolerance policy’ which means the local administration cordons off and declares the area under lockdown, even with one Covid case. With the increase in new Covid cases which fears the fourth wave, the Chinese authorities have declared lockdowns in a number of industrial hubs which has started affecting production on petrochemical refineries, albeit on a low scale. The impact on petrochemical refineries on the production of polymers and feedstock will be assessed depending upon the intensity of increase in Covid cases. The impact on industrial production, however, will be visible in near future,” said a senior official of a large polymer producing company in India.

After nearly two years of stability, the number of new Covid cases started rising early this month but surpassed the magical four-digit mark of 1000 on March 14, for the first time since March 13, 2020. On March 22, the total number of new Covid cases stood at 4,770, as China’s ‘zero-tolerance Covid policy’ was confronted by an Omicron wave. A sharp increase in Covid cases has been reported in the northeast province of Jilin, and the city of Shenyang in neighbouring Liaoning province. Lockdown in this city with a population of around 9 million was announced late Monday.

According to reports, the Chinese government has imposed travel restrictions and lockdown across 20 major cities in the country including Hubei, Guangdong province, Shanghai, Shaanxi, and Henan, which have reported a sudden increase in the new Covid cases. In Shanghai alone, the new Covid cases are rapidly approaching 1000. Last week, Chinese President Xi Jinping stressed the need to minimize the impact of the Covid pandemic on China’s economy but stressed the need to follow a ‘zero-tolerance’ strategy.

“Supply chain has been reported to have disrupted in some of the major Covid-hit cities. Internal movement of raw materials and finished products has been impacted. But, it is yet to have a major impact on the global polymer supply chain which will spread sooner than later. Polymer prices are rising on input cost pressure due to a sharp increase in crude oil prices. As long as Russia’s invasion of Ukraine and thereafter global sanctions on the Russian trade continues, polymer prices would remain volatile,” said Chandraketu Rakholia, Manager (Sales and Marketing), Pandya Polymers LLP.

In China, major petrochemical refineries in Covid-hit regions are reported to have cut production. The petrochemical industry is one of Hubei’s pillar industries. Petroleum extraction, petroleum refining, chemical industry, basic chemical raw materials, and rubber processing take a leading role in the petrochemical units in Hubei. Chemical materials produced in Hubei include sulphur, phosphorus ore, crude oil, sulphuric acid, caustic soda, synthetic ammonia, and chemical fertilizer. Sinopec Wuhan Petrochemical operates the Wuhan refinery in Hubei with a crude distillation unit, hydrocracker, hydrotreater, and alkylation facilities among others. Guangdong province houses major petrochemical units like the one of ExxonMobil.

Exist in Shanghai, Sinopec Shanghai Petrochemical Company Ltd, the subsidiary company of Sinopec, is one of the largest petrochemical enterprises in Mainland China. It is engaged in the production of ethylene, fiber, resin, and plastics. Similarly, petrochemical units that exist in other Covid-hit provinces are also likely to witness a decline in production due to lockdown-induced restrictions.

The lockdowns in major industrial cities are set to affect China’s economic growth which was estimated at 5.5 percent for the current year. In a major worry for supply chain participants, the Asian chemical tanker shipping market continued to see upward pressure for freight rates on several routes, primarily because of disruptions in Chinese ports.

According to Rakholia, polymer prices face upward pressure following an increase in the cost of raw materials. Both, crude oil and naphtha prices have jumped significantly since Russia’s invasion of Ukraine began four weeks ago, he added.


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