In the fourth quarter, the pressure of domestic polyolefin new production capacity release, supply side is facing a larger increase expectation, while the peripheral market also ushered in the peak of capacity expansion, olefin prices continue to bear pressure, import pressure has increased, especially PE market is more significant. On the demand side, downstream construction of plastics is at a low level, the overall demand is weaker than last year, downstream construction of PP is still acceptable, but due to the negative growth of automobile production and the decline of household appliances production, terminal demand in the fourth quarter is hard to say optimistic. From the valuation point of view, in the first half of the year, the production cost of Shenhua Baotou and China Coal Energy and other coal chemical giants ranged from 5100 to 5700, and the gross profit of sales was still more than 1500 yuan/ton. Horizontal comparison of polyolefins in chemical products was overestimated.
Therefore, under the background of loose supply and weak macro-level in the fourth quarter, there is still room for downward market price focus.
Domestic supply increased in the fourth quarter
In 2019, domestic PE plans to put into operation six sets of devices, involving capacity of 2.38 million tons per year. Among them, Jiutai energy products have been put on the market in June, and Sino-Angolan Union has also achieved mass production and sales in September. Baofeng Phase II is expected to be commissioned in October. Qinghai Damei, Zhejiang Petrochemical and Hengli plan to put into production in the fourth quarter. Although some devices may be delayed, the centralized release of new capacity in the previous period in the fourth quarter will still bring a lot of incremental supply.
In 2019, China’s PP plans to put into operation eight sets of devices with a capacity of 3.47 million tons per year. Among them, Satellite Petrochemical, Jiutai Energy and Hengli have been put into operation smoothly. Zhongan started commercial operation in September. Juzhengyuan is expected to produce in October. Baofeng plans to start production in October, and Damei and Zhejiang Petrochemical Plans in Qinghai put into production in the fourth quarter. At present, Juzhengyuan, Zhongan and Baofeng products are expected to concentrate on the market in the fourth quarter.
This year is a small year of petrochemical overhaul, especially PE varieties, and the low overhaul rate also led to a substantial increase in production, of which the cumulative output of PE increased by 12.9% (2.2% last year) in January-August and 13.1% (9.7% last year) in linear cumulative growth. At present, the planned maintenance in the fourth quarter is not strong, and the pre-parking devices will be restarted at the end of September. Under the background of new capacity release and maintenance return, the market supply pressure may be further highlighted.
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With the help of overhaul window and increased sales, Petrochemical olefin inventory has dropped to a low level in the year, and low inventory supports short-term market prices. However, with the device restart at the end of the month, the market supply gradually returns, and downstream has some inventory, Petrochemical is expected to reopen the accumulation, especially after the National Day holiday will appear obvious accumulation.
The import window opens again
In 2019, foreign countries are also the year of polyolefin production. PE and PP plans to increase production capacity by 5.29 million tons per year and 3.05 million tons per year. From a time point of view, peripheral production is concentrated in the second half of the year, and some new devices will be exported mainly to China, which will undoubtedly increase the supply pressure in the domestic market.
Customs data show that PE imports totaled 9.523 million tons from January to July, up 18.2% year-on-year, LLDPE imports 3.031 million tons, up 24.9% year-on-year. Loose supply in overseas markets has led to pressure on US dollar quotations, and the current import window has reopened. With the release of overseas capacity in the fourth quarter, PE import pressure has increased, especially in the competitive low-end material market.
Customs data show that PP imports from January to July totaled 2.844 million tons, an increase of 6.4% (up – 3.3% last year). Since late August, due to the rebound in domestic prices, the price gap between domestic and foreign prices has shifted to a positive link, and the import window has reopened. Combined with the transport time accounting, it is expected that October arrival volume will increase annually.
Weakening downstream demand expectations
The data show that the cumulative output of plastic products from January to August was 60.669 million tons, an increase of 8.1% over the same period last year, and the cumulative export volume was 9.258 million tons, an increase of 11.0% over the same period last year. According to the third-party survey, the high output growth in July and August may be related to export rush. The United States plans to impose tariffs on the remaining commodities in October. Exports in the fourth quarter are expected to fall.
As far as PE is concerned, the downstream agricultural film has entered the peak production season, and the start-up rate has steadily increased. After the end of October, the production of packaging film has basically stabilized. Relatively speaking, the downstream load is at a low level this year, and the overall demand is weaker than last year.
For PP, downstream injection moulding load is relatively high, plastics weaving and BOPP start-up are in normal range, but affected by environmental protection and terminal demand, there is limited space for downstream start-up in the future.
From the terminal point of view, the demand for PP modification is concentrated in the automobile and household appliances industries. From January to August, the cumulative output of domestic automobiles was 15.939 million units, down 12.1% from the same period last year. The output of main household appliances was 38.0589 million units, up 5.0% from the same period last year.
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In the second half of the year, although the decline of automobile production has narrowed, the negative growth trend is still difficult to change, and the growth rate of main household appliances production has continued to decline since May. In the current market environment, the terminal demand probability continues to weaken expectations in the fourth quarter.
Industry sales gross profit is at a high level
The report of listed companies shows that the unit production cost of Shenhua Baotou PE and PP is 5164 yuan and 5076 yuan respectively in the first half of this year. The unit sales cost of China Coal Energy PE and PP is 5619 yuan and 5440 yuan respectively. The gross profit of sales is maintained at the high level of 1470-2140 yuan/ton.
Horizontally, polyolefins are still very profitable in all chemical products. With the large-scale refining and chemical projects coming into operation, the supply and demand pattern of polyolefins is expected to be relaxed, and the profits of the industry will be passively compressed.
Operational strategy: Polypropylene can establish empty list step by step near 8200, target point around 7700 – 7900, stop loss point is set according to warehouse price. Risk hints: delayed commissioning of the plant, Saudi Arabian events, macro-policy impact beyond expectations.
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