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Factors Affecting Polyolefin Price in 2012 Chunyu Gao Senior Expert Sinopec Economics & Development Research Institute.

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Presentation on theme: "Factors Affecting Polyolefin Price in 2012 Chunyu Gao Senior Expert Sinopec Economics & Development Research Institute."— Presentation transcript:

1 Factors Affecting Polyolefin Price in 2012 Chunyu Gao Senior Expert Sinopec Economics & Development Research Institute

2 Polyolefin Price Trends Factor 1: Economic Development Factor 2: Crude Oil Price Factor 3: Supply & Demand Other Factors Contents

3 Polyolefin Price Trends

4 Southeast Asia Polyolefin Market Polyolefin price rebounded in Northeast Asia market in Q1 2012. As of end of March, the average price reached $1,400/t, which was $150/t higher than the beginning of 2012. And then in May, polyolefin price fell back as the crude oil price dropped. 700 900 1100 1300 1500 1700 1900 Jan - 09 Apr - 09 Jul - 09 Oct - 09 Jan - 10 Apr - 10 Jul - 10 Oct - 10 Jan - 11 Apr - 11 Jul - 11 Oct - 11 Jan - 12 Apr - 12 LDPELLDPEHDPEPP PP Copolymer $/t

5 Polyolefin price in domestic market rebounded in Q1 2012 as well, by 500- 800 Yuan/t as of end of March. Among polyolefin products LLDPE had the highest rate of price markup. Again, in May, polyolefin price fell back as the crude oil price dropped. Domestic Polyolefin Market 8000 9000 10000 11000 12000 13000 14000 15000 16000 Jan - 10 Mar - 10 May - 10 Jul - 10 Sep - 10 Nov - 10 Jan - 11 Mar - 11 May - 11 Jul - 11 Sep - 11 Nov - 11 Jan - 12 Mar - 12 LDPELLDPEHDPEPP PP Copolymer Yuan/t

6 Factor 1: Economic Development

7 World economy: recovery started in Q2 2012 If Europes debt crisis continues evolving slowly, world economy growth will rise from 2.6% in Q1 to around 3.4% in Q2. In developed world, economy growth will rise from 0.6% to 1.0%. In emerging and developing world, economy growth will rise from 5.0% to 6.0%. World Developed economies Developing/emerging economies Annualized QoQ GDP Growth

8 World economy: recovery goes stronger, and US recovery offsets the cumbrance from the Euro area According to leading indicator of JP Morgan Chase, the PMI for all global sectors in February 2012 was 55.5 - the highest level since 2012 (54.5 in January), also above the critical point of 50. Baltic Dry Index has been climbing since early February 2012 to 30% as of March 12, which was still a low level. All sectors Services Manufacturing Baltic Dry Index Mar 2011 May 2011 Jul 2011 Sep 2011 Nov 2011 Jan 2012 Mar 2012 Feb 3, 2012

9 US: growth continues in Q2 2012 Favorable factors Federal Reserve does not change its extremely loose monetary policy Unemployment preferential policy continues Natural gas price kept low Unfavorable factors Europe's debt crisis gets worse Higher crude oil price Two-party politics Driven by investment and export, US GDP growth rose from 0.4% in Q1 to 3.0% to Q4 2011. JP Morgan Chase estimates that US GDP growth will rise from 1.5% in Q1 to 2.5% in Q2 2012. Annualized QoQ Growth ConsumptionInvestment ExportImport Integrated leading indicator – US GDP

10 The Euro Area: recovery starts in Q2 2012, but at low speed Favorable factors IMF will provide more relief funds to Greece ECB will keep its loose monetary policy Governments and banks will provide more support to recovery GEP growth dropped from 2.4% in Q1 to 0.7% in Q4 2011. Negative growth was observed in consumption, and import growth went down to a low level. Unfavorable factors Financial pressure leads to fiscal austerity, which will restrain consumption Leading banks lack credit strength Possibility of Sovereign debt crisis going worse The European Commission estimated on Feb 23 that GDP in the Euro area will shrink by 0.3% in Q1 2012. Germany: 4.6% in Q1 to 2.0% in Q4; France: 2.2% to 1.4%; growth was still positive in Spain but negative in Italy; recession continued in Greece, Ireland and Portugal. QoQ Growth Consumption Investment Export Import France Italy Germany Portugal Greece Spain Ireland QoQ Growth

11 BRICS: growth slowdown continues in 2012 Unfavorable factors Central banks hesitate in raising or even cut interest rate, stimulating capital investment Governments will keep expanding fiscal expenditures Favorable factors Currency appreciation pressure and weakened demand from main economies keep slowing down export growth Inflation pressure Extremely loose monetary policies of developed economies cause instability to BRICS financial markets India: GDP growth dropped from 7.3% in Q1 to 6.5% in Q4 2011; Brazil: 4.1% to 1.4%; Russia: rose from 3.8% in Q1 to 4.9% in Q3. QoQ GDP Growth Brazil India South Africa China Russia OECD Leading Indicator - BRICS Brazil India South Africa China Russia

12 50.5 51 35 40 45 50 55 60 JanFebMarAprMayJunJulAugSepOctNovDec 20072008 20092010 20112012 % PMI China: economic growth slows down in a steady manner in 2012 GDP growth in Q1 was 8.1% - the lowest in recent three years GDP growth slowed down quarter by quarter since 2011 Manufacturing PMI bounced recovered in March 2012 PMI climbed to 53.1% from 51.0% in the last month - the growth has lasted for four months. Meanwhile, HSBC PMI was 48.3% in March - higher than February but still depressive PMI in Feb was the lowest since 2006 (except 2009)

13 Investment growth will slow down slightly Favorable factors Implementation of New 36 will facilitate private investment in railway, civil, finance, energy, social undertakings and other sectors Q2 is a busy season, and investment in newly-commenced projects will show steady growth Investment in affordable housing and agricultural infrastructures Investment in industrial projects in middle and western regions Unfavorable factors China failed to meet the goals set for energy consumption, carbon dioxide emission and nitrogen oxide emission in 2011, so the development of industries with high energy consumption will be further restricted in 2012 Many of the loans made through local financing platforms will mature in 2012, and local governments will face huge financial pressure Growth of investment in manufacturing and infrastructure will slow down Newly-commenced projects grew by 23.2% in January and February, and growth was 0.7% higher than last year Investment growth in Q1 2012 was 20.9%, which was 2.9% lower than that of 2011 YoY Growth: Investment (left) YoY Growth: Newly-commenced projects (right) Manufacturing Transport, warehousing and post services Water conservancy, environment and utilities Real estate YoY Growth of Investment in various sectors

14 Favorable factors Consumption stimulating policies Paid vacations, consumer credits and preferential policy for first-time home buyers E-commerce realized a total turnover of 780 billion Yuan in 2011, and new consumption modes including online shopping will be further promoted in 2012 Production and supply of energy saving products will be enhanced to benefit more people Improvement of consumption environment and consumption capacity Household registration reform will be quickened to attract more eligible rural population to settle down in middle- and small-size cities SMB facilitating policies will help improve employment and then increase consumption Unfavorable factors Potential price increase According to the government's work report, the CPI goal is set at 4%, which was higher than the CPI goals (average 3.7%) and actual inflations (average 3.1%) of previous years since 2005 Other factors driving inflation such as increasing labor cost and climbing oil price Automobile and housing consumption cooled down YoY growth of total retail sales of consumer goods in Q1 was 14.8% - the lowest level since 2007 Consumption will grow at a lower speed Total retail sales of consumer goods: cumulative value Total retail sales of consumer goods: YoY growth 100 million Yuan CPI: YoY Growth

15 Regulation and control on real estate continues Total real estate sales dropped by 14.0% in January and February, and this was the first time negative growth showed since 2010 Normalized interest rate for first-time home buyers will stimulate rigid demand Car sales will grow but slowly Car sales dropped by 6.0% in January and February Rigid demand still exists, and purchase of school bus will increase Sales of household appliances will fall Sales of household appliances decreased by 2.9% in January and February, and it was the first time the growth turned negative since March 2009 Appliance trade in and appliances going to the countryside ended in late 2011, but new stimulating policies are not in place Sales volume in February grew fast because of the different number of effective working days due to Chinese New Year Consumption will grow at a lower speed Real estate sales per month (left) Growth of real estate sales (right) Growth of newly-commenced housing projects (right) 10,000 m 2 Car sales per month (left)YoY growth (right) Retail Sales Household appliances and A/V equipment: YoY growth Knitwear and textile: YoY growth

16 Trade surplus in Q1 was only $670 million Export growth in Q1 was 7.6%, import growth 6.9%, both were the lowest in recent years (except 2009) Export environment is extremely harsh Europe's debt crisis will continue to impact external demand Emerging economies cool down Trade friction between China and US may intensify during in the election year Increasing labor cost, RMB appreciation, unstable international environment, etc. will increase export cost No sign of improvement is seen in general operation of SMB, making stabilization of export more difficult Chinas export to US, EU, Japan and ASEAN recovered in February Trade surplus per month Export value: YoY growth Import value: YoY growth $100 million Japan EU US ASEAN YoY export growth of various economies HSBC China PMI Prosperity Threshold Export growth slows down, but may recover in the 2 nd half

17 Factor 2: Crude Oil Price

18 18 Process flow of petrochemical products Intermediate products Monomers & polymers Synthetic resin Synthetic fiber Synthetic rubber Naphtha Light diesel oil Others Pyrolysis gasoline Naphtha Mixed xylene Others Ethylene cracker Aromatics unit Coal Residue oil Natural gas Deoiled asphalt Ethylene Propylene Butadiene Acetic acid Vinyl acetate Phenol/Acetone Butanol/octanol Styrene Benzene Toluene P-xylene Glycol Polyvinyl alcohol Acrylonitrile Caprolactam Polyester HP polyethylene LP polyethylene Linear LD polyethylene PVC PVA Acrylic PP Polypropylene Polystyrene Styrene-butadiene rubber Butadiene rubber Butyl rubber Nylon Terylene Synthetic ammonia Urea

19 Crude oil price in international market was volatile and reached new high level in Q1 Crude Oil Price 2011-2012 $/bblQ1 2012 AverageYoYChain Rate Brent Spread WTI102.939.4% -15.4 Brent118.3512.5%8.6% Dubai115.8615.6%10.5%-2.5 1. US launched financial sanction against Iran; 2. S&P lowered credit rating of 9 countries in Euro area; 3. Cold weather in Europe drove the demand for heating oil; 4. Greece almost reach at a salvage agreement; 5. Iran refused inspection by IAEA; 6. High crude oil challenged world economy; 7. Natural gas leak in North Sea; 8. US and EU discussed about releasing strategic reserve. $/bbl Brent-WTI spread WTI Brent Dubai

20 World Crude Oil S&D million bbl/day Source: Adapted from IEA data, April 2012. Shortage of global oil supply will reach 400,000bbl/day in Q3 2012 due to uncertainties in S&D and limited production increase by OPEC. 201020112012 Annual Q1Q2Q3Annual OECD 46.0 45.4 45.344.245.445.1 Non-OECD 41.9 43.3 43.644.445.144.4 Total demand 87.988.788.988.690.189.5 Non-OPEC52.052.152.652.352.8 OPEC 34.7 35.7 37.337.036.937.0 Crude oil29.429.9 31.230.830.430.7 Condensate Total supply 86.787.889.989.389.789.8 Gap -1.2 -0.9 1.00.7-0.40.3 Forecast on Crude Oil Price in Q2/Q3 2012 Q2 2012Q3 2012 ForecasterBrentWTIBrentWTI Barclays118104121107 Credit Suisse124110128118 FirstEnergy121105119107 Citibank117104113103 Merrill Lynch122106117106 BNP Paribas119105117105 JP Morgan Chase 112103120114 Goldman Sachs120114120115 Societe Generale 128116135127 BPI122103126105 Average * 119105117107 Cambridge Energy 122105120107

21 2009-2012 Latest trends in crude oil market: Elections in France and Greece affect the Europes debt crisis; Recession in the Euro area leads to low oil demand; OPEC increases its production to a record high level; USD appreciates quickly; Oil price fall back quickly due to concentration of previously covered risks. Brent crude oil price in Q2 is estimated at $115/bbl. World economic recovery continues, oil demand grows in terms of both YoY and chain rate; Uncertainties in oil supply increase due to hurricane season and maintenance of refineries; Gap in supply still exists, as OPEC reduces its production to the level of 2007; USD turns weak, low interest rate and high debt ratio increase cash flow. Generally the YoY growth will remain unchanged, and chain rate growth will rise.. Average price of Brent crude oil in Q3 2012 is estimated between $115 and $119/bbl. Notable trends in Q3: $/bbl Brent-WTI spread $/bbl Brent

22 Factor 3: Supply & Demand

23 China's PE production declined in Q1, while PP production increased slightly, but demand growth kept falling; LLDPE price rose and other polyolefin products lowered, gross margin was relatively stable. In Q1 2012, domestic PE production was 2.63 million tons, PP 2.84 million tons, YoY growth - 3.2% and 6.5% respectively. PE import grew while PP import fell. Apparent consumption: PE 4.5 million tons and PP 3.76 million tons, YoY growth 0.5% and 3.5%. Consumption growth dropped 0.3% and 4% respectively. In Q1 2012, polyolefin price rebounded in domestic market, especially LLDPE and PP. But the quarterly average prices generally fell except LLDPE. Gross margin was relatively stable, but still below break-even point. 2010-2012 PE PP PE growth PP growth 10,000 Yuan

24 Polyolefin market demand will drop in Q2. However, limited domestic production and maintenance of ethylene units in Southeast Asia may drive the price to climb and the gross margin to cover. Polyolefin demand in domestic market is estimated to drop in Q2: PE falls by 2.3%, PP 4.3%. Capital supply is still right, and more units in neighboring countries/regions will be shut down for maintenance in Q2, leading to lower stock. Domestic petrochemical companies will continue limiting production. Apparent Quarterly Polyolefin Consumption 2010-2012 Polyolefin price may rebound in Q2; Gross margin will be better, but still around break-even point. Gross Margin of Polyolefin 0 100 200 300 400 500 600 2010Q12010Q22010Q32010Q42011Q1 Q22011Q32011Q42012Q12012Q2 PEPP 10,000t Yuan/t Naphtha

25 Number of Futures warehouse receipts registered with DCE declines since April End of March is the time for re- registration of futures warehouse receipts specified by DCE. Beginning in April, fewer new warehouse receipts were registered, and total number as of May 10 was only 4,276 contracts.

26 Other Factors

27 Olefin price Changes in stock level Export factor Monetary policies

28 US and EUs sanctions against Iran may force Iran to increase its export to China, resulting in smaller spread between LLDPE and LDPE US and EUs sanctions against Iran and Iranian central bank have changed Chinas PE import by the end of 2011; Substantial price cuts by Iran and domestic barter trade will increase PE import volume from Iran; More cheap PE from Iran will be imported, and may cause disorder in domestic market. PE Import from Iran 2011-2012 Iranian PE makes up about 10% of Chinas total PE import, including LDPE (20%) and HDPE (10%). The price difference between LDPE and LLDPE will be narrower in Q2. 10,000t

29 Thank You!

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