【SCI View】"Black Swan" Incidents Promoted PVC Prices to Rise

"Black Swan" Incidents Promoted PVC Prices to Rise

Preface

Recently, impacted by the “black swan” incident in Saudi Arabia, the futures prices of chemicals jumped. The PVC futures prices rebounded noticeably as well.

In the early morning of September 14th, the world’s largest petroleum processing facility in Saudi Arabia and a major oilfield operated by Saudi Aramco were hit by 10 drone attacks that have disrupted more than half of the kingdom’s oil output and could affect global supplies. It has become the biggest "black swan" incident in the crude oil market in the past 30 years. Both WTI and Brent’s opening prices’ intraday upward range have hit the biggest level since 1991.

The attack on petroleum processing facility in Saudi Arabia caused about 5 million bbls/day, accounting for about 50% of Saudi Arabia’s total oil supply, while Saudi Arabia’s oil output accounted for 10% of the world’s total. The prices of international crude oil and related downstream products showed a large increase. The domestic crude oil price increased by 13.8% compared with the closing price before the Mid-Autumn Festival. The futures prices of chemicals stopped declining, and those of ethylene glycol, plastics, fuel oil, asphalt and other products even hit limit up in recent two days.

As an important variety of chemicals, PVC has a relatively small correlation with crude oil, but it is also affected by the overall atmosphere of the futures market. The PVC futures prices have also rebounded significantly in the past two days.

The main feedstock of PVC is calcium carbide. The calcium carbide-based PVC accounts for about 82.2%, and ethylene-based PVC accounts for 17.8%. Both imported ethylene and imported VCM resources are mostly from the parent company of the joint ventures, so the PVC industry chain has a low relevance with the attack on petroleum processing facility in Saudi Arabia. But the impact of attack on the PVC market cannot be ignored.

Besides, the fairish PVC supply-demand fundamentals promoted the market a lot. As seen from the below chart, PVC market prices rallied from end-August, and the three main influential factors were as follows.

First, PVC prices slipped in H2 August, and calcium carbide prices rose recently, leading to low PVC value of assessment, which was accepted by end users.

Second, the macro economy has improved, as the deposit reserve ratio is expected to reduce, and the Sino-U.S. friction has been eased.

Third, the PVC industry entered peak season, so the PVC inventory in East China and South China reduced rapidly.

Underpinned by above three factors, PVC prices rose by around RMB 50/mt. Then the “black swan" incident promoted PVC prices further.

The situation in the Middle East is worthy of attention. The situation in the Middle East is severe. The main participants are the U.S., Iran and Saudi Arabia. Although the U.S. and Iraq have recently issued threats of military action, Donald Trump will face election next year, so he must reduce geographical conflicts and curb international oil prices to ensure that the U.S. economy keeps growing. For the Iranian government, the most urgent task is to restart negotiations with the U.S. Otherwise, Iran will face tremendous pressure under the pressure of the U.S. economic blockade. But it will be hard to ignite the conflicts among all parties.

The situation in the Middle East is complicated, and it is difficult to rule out other accidents. However, from the perspective of interests of the major participants, the situation will not be aggravated a lot for the time being. Therefore, impacted by the market sentiment temporarily, PVC prices will possibly rise slightly in the short term. But with the National Day holiday approaching and long-term bearish expectation, the expectation for the PVC price trend in the long run is still conservative.

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