China PP Prices Supported by Policy
Preamble: The real estate industry has ushered in a series of supportive policies recently. The policy is more expansionary than expected, which has effectively boosted the consumption confidence of market players and is expected to stimulate demand release. PP prices pictured a wave of noticeable rise accordingly. However, whether PP prices continue to rise and the upward range will probably depend on fundamentals which may produce limited support to the price.
Brightened Macro Environment Drove Up PP Prices
On May 13, The Ministry of Finance announced the relevant arrangements for the issuance of general Treasury bonds and ultra-long-term special Treasury bonds in 2024. In 2024, the issuance of ultra-long-term special bonds has a maturity of 20 years, 30 years and 50 years, and the interest payment method is based on semi-annual interest.
On May 17, a new round of financial measures supporting the real estate market was announced. First, the People’s Bank of China decided to cancel the lower limit of the interest rate policy of commercial individual housing loans for first and second homes at the national level. Second, the People’s Bank of China decided to reduce the interest rate of individual housing provident fund loans by 0.25 percentage points from May 18, 2024, and adjust the interest rate of individual housing provident fund loans of less than 5 years (including 5 years) and more than 5 years to 2.35% and 2.85% respectively. The interest rate of the second set of individual housing provident fund loans for less than 5 years (including 5 years) and more than 5 years is adjusted to not less than 2.775% and 3.325% respectively. Third, the central bank and the State Administration of Financial Supervision, for residential families who borrow to buy commercial housing, the minimum down payment ratio of commercial personal housing loans for the first set of housing is adjusted to not less than 15% and that for second sets of housing is adjusted to not less than 25%.
The loose policy improved the pessimistic stance, and PP market prices also gained ground.
As seen from the above chart, PP market prices all moved up in East China, South China and North China with different upward ranges. On May 17, the daily upward range of raffia prices was RMB 90-110/mt in East China, RMB 60-90/mt in South China and RMB 50-120/mt in North China. That is the largest daily increment in the past two months. However, the growth in spot prices was softer than that in PP futures prices because of limited momentum from fundamentals.
Intensive Maintenance Left Low Supply Pressure
Recently, PP unit maintenance has been intensive because some units that underwent maintenance previously didn’t restart and some new units shut down. PP supply was not plentiful with a structural supply crunch in some regions. However, cross-regional allocations dropped due to the narrowed price spread of goods in different regions. The overall inventory at traders was not enough, and downstream users showed increased buying appetites for PP on the back of some stimulus policies.
Limited Profits Made Downstream Users Resist High-Priced Feedstock and Maintain Basic Purchases
According to the research, the operating rate at downstream users changed within a narrow range and many thought demand would see a limited decrease in the future. The feedstock inventory at downstream factories was low. This year, the feedstock inventory level at most scale factories was maintained at 15-30 days compared with 1.5-2 months in the same period of previous years due to weak orders and tepid production profits this year. They may show resistance to high prices.
Further Advancement in PP Prices Likely to Narrow Without Robust Fundamental Support
Generally, the PP market price is expected to keep rising as the players’ confidence in the market ratchets up with improved macro environment, but the price increase may be restricted by fundamental changes. The supply will trend up with the weakening of follow-up unit maintenance and new capacity. Issues such as the rebound in profitability and the sustainability of demand remain to be seen although downstream demand may improve under the support of policies.
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