PP Prices Stalemated amid Soft Demand and No Implementation of Macro Policies
Highlights: The stronger-than-expected meeting outcomes and economic data have continued to warm the recent macroeconomic sentiment. However, the weak pattern of supply and demand remains relatively evident, with spot PP market transactions performing weakly. Market players still hold a bearish outlook about the short-term market.
Macro Information Supports Market Sentiment
General macro information has created a supportive atmosphere for commodity market sentiment. The Sixth Meeting of the Central Financial and Economic Affairs Commission on July 1 emphasized focusing on key challenges, regulating enterprises’ disorderly low-price competition in accordance with laws and regulations, guiding firms to enhance product quality and facilitating the orderly exit of outdated capacity. The intensive release of “anti-cutthroat competition” signals has triggered a “production reduction wave” in some industries.
Buoyed by the meeting’s expectations, overall commodity market sentiment has improved, driving up the main PP futures contract price. Producers and traders have shown stronger price-supporting intentions. In addition to supportive policy guidance, various financial data released in July also beat market expectations, indicating a shift toward a moderately accommodative monetary policy.
Gross Profit from PP Production Improved
Crude oil, propane and coal prices have remained low recently, leading to improvements in profits. As of July 11, crude oil and coal-based PP production profits averaged RMB -451.84/mt and RMB 800.56/mt respectively in July, up 51.75% and 410.76% YOY. Besides, CP settled below market expectations. The decline in import prices has dampened market sentiment slightly, pulling down mainstream prices of propane. This triggered a 5.26% MOM decrease in the PDH-based PP production costs, while gross profit increased by 27.81% as of July 11. Overall, profit recovery reduced the incentive for PP producers to cut operating rates or halting production. Operating rates remain relatively high, and there are no plans for short-term supply cuts.
Downstream Industry Operating Rate Declines During Off-Season, and Shipping Costs Remain High.
PP downstream industries show clear consumption off-season characteristics. Some daily necessities, plastic woven and home appliance plants have suspended operations and taken holidays because of weak orders compounded by high temperatures, leading to an overall decline in operating rates. Therein, plastic woven enterprises face a higher inventory level of finished products, and BOPP enterprises primarily consume existing feedstock inventory with shortened order cycles. Overall downstream restocking interest remains weak, dampening market transactions in China.
As for overseas demand, mainstream shipping rates from China to Europe have risen a lot since June, driven by consecutive freight rate increases on U.S. routes and shipping lines’ capacity control measures, raising export costs. Furthermore, the inherent seasonal increase in logistics and labor costs during summer, coupled with disruptions from the typhoon season extending maritime logistics cycles, is further impacting overseas demand.
Source: SCFI
PP Prices Perform Poorly with Soft Fundamentals, Despite Warming Macro Environment
In summary, the macro environment continues to warm up, but there is still a fundamental imbalance with ample supply and sluggish downstream demand. Besides, it is hard to realize capacity rationalization in the short term. Therefore, China’s PP market prices are expected to underperform in July.
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