A broad-based rebound in China's local petrochemical prices last week
could push teetering markets even closer towards a crash due to poor market
fundamentals downstream, producers and traders said Monday.
     China's petrochemical prices rallied across the board after the Chinese
government's implementation of a $586 million stimulus package last week aimed
at tiding the economy over the global market downturn.
     Prices of aromatics, olefins, polyolefins, MTBE, plasticizers and
oxo-alcohols reacted to the bullish news with a concerted upswing, with the
prices of certain products rallying more than 10% in the Yuan-based domestic
petrochemical market.
     Despite this, producers and traders polled were largely pessimistic about
the market outlook, seeing speculative influences at work. Players were
unconvinced that downstream fundamentals had improved enough to warrant this
uptick, fearing that rising prices could instead push petrochemicals teetering
closer towards another plummet.
     Despite robust demand for petrochemicals over the past week, few
end-users displayed appetite for feedstock -- traders were most aggressive in
the hunt for cargoes.
     "I can consider buying orthoxylene to feed my phthalic anhydride
production, but only if the feedstock cargo arrives promptly. There are
margins for us if we can turnaround the feedstock to deliver our product
promptly. However, we really don't see this supported by strong downstream
fundamentals, especially in the second half of December," a producer in
eastern China said.
     Uptake of prompt imported material was relatively tame compared with
local material. Imported materials appeal to buyers who can purchase on a
bonded basis for re-processing and export, without the need to pay duties
like value-added tax. Few producers were keen to consider this option last
week, given overcast conditions in export markets.
     According to industry sources, bullish speculators were drawn to lengthen
their positions under the belief that China's stimulus package would spur
downstream demand, and hence petrochemical prices.
     Additionally, even if prices remained unchanged, buyers purchasing on
a 90-day credit basis and selling on shorter payment terms obtained relatively
cheap credit, which they could channel into other speculative activities.
     "Although oil prices have fallen very sharply in recent weeks, Chinese
domestic prices have actually risen. Seeing how Yuan prices typically take
some time to react to international trends, local prices are poised to crash
after last week's surge," a Shanghai-based fiber intermediates trader said.
--Chuan Ong, chuan_ong@platts.com

(Platts, Nov 17, 2008)