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Polymer prices offer 20-50% arbitrage on the surplus in China and shortage in Europe

On Wednesday, April 13, 2022 at 02:13 IST

At a time when the world is struggling to overcome the impact of the Russia-Ukraine war coupled with supply disruptions from China on account of the coronavirus (Covid)-induced lockdowns, arbitrageurs see an enormous trading opportunity in the volatile polymer price movements between China and Europe.

Most polymers are currently trading in China at around a 20-50 percent discount to their prevailing prices in Europe primarily due to the demand-supply imbalance. While producers across China are unable to transport polymers from the factory premise to the port for shipment overseas and also to the downstream industry for processing because of lockdowns, massive traffic congestion at Chinese ports has worsened the movement of ships for loading and unloading. Eventually, the unavailability of workers at the port following Covid restrictions has crippled port traffic movement.

In China prices of various olefins and polyolefins are under downward pressure while in Europe, there is a strong bullish undertone for want of material. Propylene price for both domestic origin and imported variety is hovering at around euro 1580-1590 (US$1597-1607) a tonne for immediate delivery in the North West European markets as compared to US$ 1217-1232 a tonne in East China. Similarly, polypropylene prices are quoting in the northwest European market at around euro 1995-2005 (US$ 2017-2027) a tonne compared to US$ 1342-1381 a tonne in East China. Elsewhere across China also, polypropylene is quoted in the range between US$ 1349-1404 a tonne. The price anomaly is no different for other polymers across the two regions. Polymer prices have declined in China and increased in Europe in the last few weeks.

“China is a major polymer manufacturing hub where producers dump their output to the local markets in case of supply disruptions. Today, Chinese producers are unable to export their products outside the country on account of rapidly spreading coronavirus cases and local authorities imposing lockdowns following the country’s ‘zero-tolerance' policy on the pandemic. Hundreds of inward ships are stranded at several Chinese ports, thereby resulting in a shortage of containers and rising freight rates. On the other hand, European markets are facing acute supply shortage because of the Western countries’ economic sanctions on Russia following its military offensive in Ukraine,” said Arafat Saiyed, an analyst with Reliance Securities, to Polymerupdate.

The European markets are currently in short supply of polymers. Shipments from China have gotten disrupted but consumption still continues at a normal pace in Europe. Also, the economic sanctions imposed by the major Western economies and the United States on Russia have further tightened the supply of polymers in the European region.

Across Europe, including Germany, France, Italy, the United Kingdom, etc, polyethylene prices are quoted between US$1950 and US$ 2200 a tonne, sharply higher than its current prevailing price in East China.

“So, the price rise in Europe and decline in China is just a supply-demand issue like any other commodity including crude oil,” said Saiyed.

Millions of residents including those in China’s capital city of Shanghai are forced to stay indoors in the worse lockdown since the Covid pandemic started in November 2019. With around 100,000 patients undergoing treatment currently in Shanghai alone and the scenario no different in select other parts of the country, the United States has issued an advisory urging its non-essential citizens to leave China immediately. Thousands of port workers and naval officials have also been stranded in the Chinese lockdowns. New Covid cases led by Omicron and Delta variants are increasing in Hong Kong and some parts of South East Asia which has worsened China’s polymer supply to these markets.

“The lockdowns in China have tightened the supply of all raw materials including polymers. The biggest problem with polymer producers is that they are unable to supply the raw material to the downstream plants. Hence, despite good demand, domestic supply disruptions have caused a scarcity of plastic raw materials at the user plants. So, primary producers are offering lower price quotes in order to keep the order books full,” said a senior industry official.

Bhagirath Jakhar, General Manager, Siya Ram Polymers, a Noida-based polymer importer and trader, told Polymerupdate, “The only reason which can be attributed to the entire price arbitrage between Europe and China is the supply disruption. The ongoing Russia-Ukraine has a major impact on the polymer supply in Europe as most advanced countries in the West have imposed economic sanctions on Russia. The Chinese markets are facing supply surplus due to Covid-related lockdowns.”

Understandably, logistics cost in Europe has suddenly gone up due to a sharp increase in energy prices. Since Russia’s military offensive started on February 24, 2022, energy costs have gone up steeply. Despite continuing Russian energy imports, the logistics costs in Europe have bolstered which impacted the movement of goods including polymers. Most European countries are landlocked. When supply gets disrupted from one primary route, opening an alternate route is very difficult.

“All these strains put together, polymer supply has dwindled in the last few weeks. The ongoing supply squeeze, therefore, is likely to keep polymer prices elevated in Europe. But surplus availability may continue to keep prices under pressure in China, thus continuing with arbitrage opportunity for traders at least in foreseeable future,” said an industry official who wished not to be named.


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