Negative production margins for film-grade high density polyethylene is feeding speculation about possible PE run cuts, market sources said this week.
HDPE film production margins fell into negative territory on December 3, falling to minus $54/mt from plus $5/mt on December 2. The production margins had been moving into a positive territory since October 22.
But sharp price increases in the Asian ethylene market -- which has been led by strong buying appetite in China -- since early November squeezed the margins.
The Asian ethylene market started climbing in November as lower steam cracker operations amid a naphtha supply crunch in China sparked spot buying from Chinese end-users.
Naphtha supplies from Chinese refineries were also said to be reduced as they switched their priority to production of gasoil. China's insatiable appetite for gasoil -- which began early November -- was prompted by industrial users having to use diesel generators, after local governments began cutting power supplies in line with Beijing's attempts to cut energy consumption and emissions by the end of 2010.
Market sources estimated that ethylene production was cut by 10% due to the lower runs at naphtha-fed steam crackers in China. As a result, the Northeast Asian ethylene price benchmark spiked $190/mt, or 19%, from November 1 and assessed at $1,179/mt Tuesday.
In contrast, HDPE film prices only showed a $17.5/mt, or 1%, increase from November 1 and were assessed at $1,280/mt CFR Far East Asia Tuesday. Market sources said China's buying appetite for HDPE film was not strong as most buyers remained on the sidelines on concerns that further credit tightening may curb demand for finished products.
Over the weekend, the Chinese government refrained from raising rates, despite inflation concerns which hit a two-year high of 5.1% in November, well up from the previous month's 4.4% and above the government's 3% comfort zone. Instead, the government chose to raise the amount of money banks should hold in their reserves.
"But a second interest rate increase is possible early next year," said a market source. In October, the People's Bank of China announced it would raise the benchmark one-year lending and deposit rates by 25 basis points each.
"Slow PE demand in China is the problem," said a South Korean PE producer. "Of course we need to increase our PE prices to reflect high feedstock costs but it is difficult to do so in the current situation."
So far, Asian PE producers have continued with full operating rates as they are still able to cover their losses with the fat profit for linear low density and low density polyethylene production. LLDPE production margins were pegged at plus $42/mt Tuesday, while LDPE margins were fat at plus $340/mt.
PE production margins are calculated based on CFR FEA PE price assessments minus CFR NEA ethylene price assessments minus $150/mt conversion costs.
HDPE film production margins fell into negative territory on December 3, falling to minus $54/mt from plus $5/mt on December 2. The production margins had been moving into a positive territory since October 22.
But sharp price increases in the Asian ethylene market -- which has been led by strong buying appetite in China -- since early November squeezed the margins.
The Asian ethylene market started climbing in November as lower steam cracker operations amid a naphtha supply crunch in China sparked spot buying from Chinese end-users.
Naphtha supplies from Chinese refineries were also said to be reduced as they switched their priority to production of gasoil. China's insatiable appetite for gasoil -- which began early November -- was prompted by industrial users having to use diesel generators, after local governments began cutting power supplies in line with Beijing's attempts to cut energy consumption and emissions by the end of 2010.
Market sources estimated that ethylene production was cut by 10% due to the lower runs at naphtha-fed steam crackers in China. As a result, the Northeast Asian ethylene price benchmark spiked $190/mt, or 19%, from November 1 and assessed at $1,179/mt Tuesday.
In contrast, HDPE film prices only showed a $17.5/mt, or 1%, increase from November 1 and were assessed at $1,280/mt CFR Far East Asia Tuesday. Market sources said China's buying appetite for HDPE film was not strong as most buyers remained on the sidelines on concerns that further credit tightening may curb demand for finished products.
Over the weekend, the Chinese government refrained from raising rates, despite inflation concerns which hit a two-year high of 5.1% in November, well up from the previous month's 4.4% and above the government's 3% comfort zone. Instead, the government chose to raise the amount of money banks should hold in their reserves.
"But a second interest rate increase is possible early next year," said a market source. In October, the People's Bank of China announced it would raise the benchmark one-year lending and deposit rates by 25 basis points each.
"Slow PE demand in China is the problem," said a South Korean PE producer. "Of course we need to increase our PE prices to reflect high feedstock costs but it is difficult to do so in the current situation."
So far, Asian PE producers have continued with full operating rates as they are still able to cover their losses with the fat profit for linear low density and low density polyethylene production. LLDPE production margins were pegged at plus $42/mt Tuesday, while LDPE margins were fat at plus $340/mt.
PE production margins are calculated based on CFR FEA PE price assessments minus CFR NEA ethylene price assessments minus $150/mt conversion costs.
