A 'new game' has begun in the chemical industry, with a key focus on the profit structure of the industry chain.

　　Review of Chemicals in 2015 and Outlook for 2016

　　Profit Erosion Behind the 'Brutal' Market

　　For bulk commodities in 2015, the word "grim" is an understatement. Iron and non-ferrous metals suffered greatly, with market prices plummeting. Chemicals were not immune to this downward trend. Except for PTA which held firm, the polyolefin "brothers" and methanol experienced a near halving in prices.

　　Data compiled by the Futures Daily reporter shows that among chemical products, PTA prices fell 24% from their yearly high, while the other three varieties all fell by more than 30%. Taking two varieties with larger declines as examples, the yearly high for polypropylene was 9027 yuan/ton, and the low was 5361 yuan/ton, resulting in a cumulative decline of 41%. Methanol fell from a yearly high of 2654 yuan/ton to 1590 yuan/ton, a cumulative drop of 40.1%.

　　Looking back at the 2015 trend, Gao Jianming, a securities analyst at Haorong Investment, believes chemical products generally reached their yearly highs in late April and entered a downward channel in early May. The most dramatic declines were seen in the "olefin" brothers and methanol, with their price movements being particularly sharp.

　　PP, as the twin brother of LLDPE, experienced a severe profit squeeze in the fourth quarter of 2015 due to ample supply. "In addition to oversupply, the plummeting price of propylene monomer to 3800 yuan/ton caused a cost collapse. The large price difference between granules and powder, with powder having better profit margins, left a large space for price reduction. PP granule prices could not stabilize, and downstream demand was weak," said Gao Jianming.

　　Compared to polyolefins, the decline in methanol prices was noticeably delayed. It can be said that the rise of methanol-to-olefin technology has closely linked methanol and olefins. "Most plants purchase methanol externally, which increases methanol demand on one hand and olefin supply on the other. Methanol and olefins have a clear linked effect. However, whether it was the sharp drop at the end of 2014 or the downturn starting in July 2015, the decline in methanol prices lagged behind that of olefins," said Cai Yali, an analyst at Zhongyuan Futures.

　　Regarding the general price decline in chemical products in 2015, industry insiders believe this trend was logical. "Coal prices have been falling since 2012, with a decline of over 60%, and crude oil prices have fallen by more than 60% since the second half of 2014." Cai Yali believes that as the source materials, the price declines in coal and crude oil directly compressed the cost of downstream chemical products, making a corresponding drop in downstream prices natural. However, the performance of each chemical product varied.

　　After three consecutive years of decline from 2011 to 2014, PTA's production profit margins were completely squeezed, leaving no room for further decline in 2015. Prices fluctuated around the cost. The decline in olefins, however, resulted from the huge profit margins left after the sharp drop in the crude oil market in the second half of 2014.

　　It is understood that in the first half of 2015, the average profit of olefins from the naphtha route was 2500 yuan/ton. The price decline in the second half of 2015 was merely the removal of high profits during a period of capacity expansion for olefins. Currently, the average profit of olefin production is 1500 yuan/ton.

　　"The olefin price spread structure is high near and low far, and the far month is at a high premium, indicating that during the capacity expansion, funds are still shorting olefin profits." said Cai Yali.

　　In December 2015, Shenhua Yulin's 600,000-ton MTO plant was put into operation. In 2016, China Coal Mengda's 600,000-ton plant, Jiangsu Shenghong's 1.2 million-ton plant, Changzhou Fude's 330,000-ton plant, Better's 300,000-ton plant, Salt Lake Group's 1 million-ton plant, Zhongtian Hechuang's 1.37 million-ton plant, and Jiu Tai Energy's 600,000-ton olefin capacity are also expected to be put into operation. "Capacity expansion is usually accompanied by profit contraction. In the mid-to-late stages of capacity expansion, prices will fall back to near the cost. From this perspective, there is still room for further decline in far-month olefin prices." said an industry insider.

　　"With weak demand, there are more shorting opportunities in high-profit industries. For example, in the PP industry, the current profit of oil-based PP production is 500 yuan/ton, which has been compressed by more than 1000 yuan/ton, but there is still room for further compression." said Gao Jianming.

　　What are the Culprits Behind the Market Disruption?

　　The decline in chemical product prices was not unexpected, but the speed of the decline exceeded market expectations. The chemical product market in 2015 was difficult to navigate, and operations were tricky. A senior industry insider specializing in chemical products frankly told the Futures Daily reporter that the "strange" market situation in the second half of 2015 was due to market expectations.

　　The China stock market crash, which led to global financial turmoil, triggered concerns about an economic crisis and prompted large-scale destocking across all links of the real economy. Under these circumstances, commodity price declines were inevitable.

　　As discussed in the market, the rapid decline in chemical product prices stems from "shorting profits." It is understood that the sharp drop in international oil prices has led to a significant increase in the profits of chemical products, especially polyolefin products.

　　With commodities almost completely collapsing, the fact that polyolefin products could be described as having huge profits was incomprehensible and unacceptable to commodity investors. The insider stated that as long as a commodity has a profit, funds will unhesitatingly short it, and polyolefins and related varieties are, to some extent, "sacrificial victims" of this mindset.

　　In fact, for chemical products, there are many factors influencing prices, the most important of which are supply and demand, and cost. In the view of Pan Zeng'en, an analyst at Xingye Futures, chemical product prices are determined by supply and demand, not cost, but sometimes cost can have a reverse effect on supply and demand. For example, in 2015, PTA entered a stage of oversupply, and prices continued to decline, resulting in a significant contraction of profits for upstream, midstream, and downstream industries, and even losses. In this situation, the industry itself entered a capacity elimination cycle, with some old capacity being shut down, thus affecting equilibrium prices.

　　In terms of cost, US crude oil fell from $62.58/barrel to $34.53/barrel in 2015, a decline of 44.8%. The impact of the cost collapse on chemical products is imaginable. However, currently, the raw materials for chemical products are trending towards diversification.

　　"The large-scale commissioning of coal-to-olefins plants means that crude oil is no longer the only cost factor to consider. The operation of PDH plants has also had an additional impact on polypropylene; natural gas and coal prices determine the cost of methanol, while the influence of oil prices is relatively weak; oil prices remain a key factor determining the cost of PTA." Pan Zeng'en analyzed.

　　In 2015, a saying circulated in the market: "Trading chemical products, if you're not careful, you'll lose everything." This is not an exaggeration. In 2015, both small investors and industrial customers experienced an unprecedented market shakeout.

　　Industry insiders believe that the "severe market washout" is related to the market's misjudgment of supply and demand. Especially the demand, once misjudged, the consequences are unimaginable.

　　"In terms of supply and demand indicators, we need to pay attention to the progress of new capacity production, the operating status of existing capacity, and the seasonal factors of demand." Pan Zeng'en said.

　　Reporters learned that for a period of time, chemical products were basically destocking. The sharp drop in futures at the end of June 2015 led to the deterioration of PTA factory cash flow. To cope with the crisis, PTA factories headed by Yisheng formulated a shutdown and maintenance plan, which was implemented successively in late July. The PTA market experienced four months of destocking. Recently, due to the increase in supply and the weakening of demand, a supply-demand scissors gap has formed, and the PTA price has weakened again.

　　In terms of polyolefins, it has been in the destocking stage since after the National Day in 2015, but the price has not strengthened. The main reason is that the profit of powder is good, and there is a large room for price reduction, which in turn drags down the price of granules. "Due to the substitution of powder and the weak downstream demand, the decline of PP was greater than that of LLDPE after October 2015, and the price difference between the two widened from 1000 yuan/ton to 2000 yuan/ton." Cai Yali said.

　　As for the decline in methanol prices, the main reason is still that demand growth is lower than expected. "Many methanol-to-olefin units were planned to be put into production in 2015, but due to various reasons, there are also many units that have been shut down or delayed production, and the expected growth of new demand has repeatedly failed. At the same time, traditional downstream demand is sluggish, the real estate industry is becoming increasingly sluggish, formaldehyde demand is gradually shrinking, and dimethyl ether has also been hit hard due to the sharp drop in oil prices." Gao Jianming believes that the above factors, coupled with the fact that methanol supply has not decreased, the decline in its price is reasonable.

　　Interlocking to play a good "bottom game"

　　In 2015, chemical product operations were disastrous step by step. In 2016, for the new game, meticulous layout is particularly important.

　　Industry insiders generally believe that in 2016, it is necessary to focus on the changes in the supply and demand pattern of chemical products themselves and the transformation of the profit pattern of the industry chain.

　　In the polyolefin market, it is expected that 2 million tons of new PE devices and 2.8 million tons of new PP devices will be put into production in 2016, and the supply of polyolefins will be oversupplied.

　　"Against the backdrop of strong supply and weak demand, the polyolefin industry chain will continue to de-profit. Based on the current crude oil and coal prices, the production profit of PE is still considerable, and the PE price will fluctuate and decline later. For PP, its overall trend is similar to PE, but at the current price, PDH devices have suffered serious losses, and the profits of both coal-based and oil-based are also squeezed. If the devices are shut down, prices may rebound temporarily." Pan Zeng'en said.

　　Similarly, in Cai Yali's view, during the process of capacity expansion, the profit of olefins will continue to be squeezed, and the price center will further shift downward. "The supply of propylene has been oversupplied, and domestic propylene-producing MTP and PDH devices are all in a state of loss. Many small MTP devices in Shandong, such as Shuguang Luqing, Ruichang Chemical, and Lushengfa, have been shut down for a long time. Among PDH devices, Wanhua, Satellite, and Sanyuan have also been temporarily shut down. In 2016, the operation of propylene-producing devices will reduce the pressure on propylene prices. The expansion of foreign polyolefins is mainly polyethylene. In 2016, nearly 2 million tons of capacity will be put into production in North America." Cai Yali believes that the downward movement of polyolefin prices will be mainly driven by the decline in polyethylene, and the price difference between PE and PP will narrow. It is expected that the price range of LLDPE will be 6000-8500 yuan/ton in 2016, and the price range of PP will be 5000-7000 yuan/ton.

　　In the PTA market, due to the thorough de-profiting of the industry chain, and the industry has entered a passive de-capacity state in 2015, about 20% of the capacity is currently in a long-term shutdown state (excluding the 4.5 million tons of equipment currently shut down by Xianglu Petrochemical), and the industry chain is basically in a state of supply-demand balance. Under this pattern, the PTA price trend in 2016 will be dominated by profits. Specifically, the price difference between PX and naphtha and the dynamic processing fee of PTA will be important indicators of market trends. Industry insiders generally predict that PTA will fluctuate between 4000 and 5500 yuan/ton in 2016.

　　As for the methanol market, the current profit of manufacturers is meager, but it is not losing money. The current low price will not stimulate the restart of natural gas units that have been shut down, methanol-to-olefin units in the northwest region are profitable, while those in East China are on the verge of loss, and the overall supply and demand in the market is weakly balanced.

　　"However, under the suppression of olefins, the methanol market will be difficult to have a brilliant performance in 2016, and the price range is expected to be 1500-2000 yuan/ton." said industry insiders.

　　It is worth mentioning that in addition to supply and demand, crude oil is still a weather vane for the chemical product market in 2016.

　　"The slow global economic recovery in 2016 will bring about a demand increase of 1 million barrels/day, and the growth of demand is slowly consuming the excess supply, but the supply exceeds demand is difficult to change." Wang Guangqian, an analyst at Dongwu Futures, said that against the backdrop of the Fed's interest rate hike, the international oil price will hover at a low level before mid-2016, and then rebound after the peak demand season and the boost of high-cost crude oil producers' production cuts or OPEC's production cuts. The WTI crude oil is expected to fluctuate between US$30 and US$55 per barrel, and Brent crude oil is expected to fluctuate between US$35 and US$60 per barrel.

　　In addition, industry insiders remind that when playing a good "bottom game", some risk factors need to be paid attention to. Among them, the most important is the change in the direction of national macroeconomic policies, which will affect prices through the expectations of the demand side. The trend of the US dollar is also a key concern. The pace of the Fed's interest rate hike in 2016 will determine the trend of the US dollar. Overall, the US dollar is in an appreciation cycle, which has a negative impact on crude oil. In addition, it is also necessary to pay attention to the impact on the supply side caused by the deviation between the actual production progress of existing equipment overhaul plans and new equipment and the expected progress.