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Polymer price declines on slow offtake, pent-up demand from China may prevent further steep fall

On Tuesday, June 28, 2022 at 04:03 IST

Most polymers prices might have reported a steep decline in the last four months, but a further sharp slide at least in the near future is unlikely due to expectations of a resurgence in pent-up demand from China, post opening up of the country’s economy from the third wave of Covid hit lockdowns.

After an initial knee-jerk reaction resulting in a temporary upsurge, both propylene and ethylene have lost around a quarter since Russia’s invasion of Ukraine started in the last week of February. Value-added products like high-density polyethylene (HDPE), low-density polyethylene (LDPE), linear low-density polyethylene (LLDPE), and polyvinyl chloride (PVC), among others, have also slipped to the tune of up to 16 percent since February.

In fact, polymer prices followed the movement in energy where the benchmark Brent crude oil in the United States reported a decline in an extremely volatile scenario. Being a key supplier to European countries, the United States, and also to major economies in Asia, crude oil supply from Russia was disrupted due to sanctions from major Western economies. Now, Russia has halted the supply of natural gas, a key energy source to run factory operations, to the major economies in Europe including Germany, Denmark, Finland, France, Greece, The Netherland, and Poland among others.

ON A DOWNWARD SPIRAL

Price movement of the key polymer value chain

Commodities

Date of recent peak

Price

Latest

Variations (%)

Naphtha (cfr, Far East)

March 9, 2022

1192

828

(-)30.54

Propylene (cfr India)

March 11, 2022

1335

1005

(-)24.72

Ethylene (cfr India)

April 6, 2022

1425

1090

(-)23.51

Polyvinyl chloride (cif India, suspension South Korea)

March 23, 2022

1650

1380

(-)16.36

Polypropylene (cif India, Raffia South Korea)

April 11, 2022

1600

1380

(-)13.75

Brent crude (per barrel)

March 8, 2022

127.98

115.09

(-)10.07

Source: Polymerupdate Research


Commenting on the role played by China in the world polymer markets, Mr. Gnanasekar Thiagarajan, Director, Commtrendz Research, told Polymerupdate, “China is a major buyer of commodities including polymers. The country does not buy only for meeting immediate raw material needs but also for storage for future consumption. In the past four months, several Chinese cities remained under Covid-induced lockdowns. But, these lockdowns were lifted with the declining number of new Covid cases. With this, Chinese players are expected to enter the buying markets resulting in fresh demand across all commodities including polymers. So, the commodity markets are set for a recovery in the near term. The only fear is that this recovery will be shortlived.”

The correction in polymer prices followed the movement in energy and raw material prices. The benchmark Brent crude oil prices in the United States reported a decline of over 10 percent since the last week of February, amid volatility and an initial upsurge which lifted its price to the record high of US$127.98 in the first week of March. But, the impact was more severe on naphtha with its prices tumbling by over 30 percent since the war began in Europe.

Unfortunately, manufacturing companies are feeling tremendous pressure on their operating margins on account of extremely high raw material prices and weak consumer demand for select products. According to Thiagarajan, manufacturing companies of these select products are least interested in ramping up their production capacities until demand picks up and consequently, margins turn favourable. Till then, manufacturers will continue with lower than average operating capacities to avoid stockpiling, he added.

In fact, the issue of commodity recession erupted after Goldman Sachs, a New York-headquartered American multinational investment bank and financial services company, forecast the beginning of commodity recession sooner or later.

While analyzing the US Fed’s policy rate hike of 0.75 percent, the investment bank said in its latest note, “We believe that this structure should perform under a range of recession start scenarios, with risks coming from either an immediate recession or a very prolonged hiking cycle. While market-implied expectations for the Fed’s policy rate have declined over the past few weeks to levels that for early 2023 have limited downside, fed funds pricing in 2024 is likely underpricing the risk of recession.”

The Bank of America (BofA) in its latest report slashed the calendar year 2022 global gross domestic product (GDP) growth forecast by 100 basis points (bps) to 3.2 percent, with risks firmly skewed to the downside. The agency sees US GDP growth slowing to 2.3 percent in the calendar year 2022 and 1.4 percent in the calendar year 2023, with a 40 percent chance of recession.

Arafat Saiyed, Assistant Vice President, Reliance Securities, said to Polymerupdate, “The current price correction across all polymers was imminent as they had spiraled on expectations of supply disruptions after Russia’s invasion of Ukraine. Another reason for a correction in polymer prices was the lifting of anti-dumping duty on select grades from China. But, we expect a rebound in polymer prices in the next few weeks with the commencement of Chinese buying.”


DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com

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