A new chess game has begun, focusing on the profit structure of the chemical industry chain.

　　2015 was a disastrous year for bulk commodities. Black and non-ferrous metals suffered greatly, with market prices plummeting. The downturn also affected chemical products. Except for PTA, which held relatively steady, polyolefins and methanol experienced nearly a 50% price drop.

　　According to statistics from the Futures Daily, PTA prices fell 24% from their peak, while the other three varieties fell more than 30%. Taking two of the worst-hit varieties as examples, polypropylene's price dropped from a high of 9027 yuan/ton to a low of 5361 yuan/ton, a 41% decrease; and methanol fell from 2654 yuan/ton to 1590 yuan/ton, a 40.1% decrease.

　　Reviewing the 2015 trend, Gao Jianming, a senior analyst at Hairong Investment, believes that chemical products generally reached their peak in late April and entered a downward trend in early May. Among them, the most dramatic were the olefins and methanol, which experienced significant price drops.

　　PP, a counterpart to LLDPE, experienced a severe margin squeeze in the fourth quarter of 2015 due to oversupply. "Besides oversupply, the plummeting price of propylene monomer to 3800 yuan/ton caused cost reductions, and the large price difference between granular and powdered materials, with powdered materials having better profit margins, led to greater price reduction pressure. This prevented PP granular prices from stabilizing, and downstream demand was weak." said Gao Jianming.

　　Compared to polyolefins, the price drop of methanol was significantly delayed. It can be said that the rise of methanol-to-olefin technology has closely linked methanol and olefins. "Most plants purchase methanol externally, increasing both methanol demand and olefin supply. Methanol and olefins have a clear correlation; however, whether it was the sharp drop at the end of 2014 or the downturn starting in July 2015, methanol price drops always lagged behind those of olefins." said Cai Yali, an analyst at Zhongyuan Futures.

　　Regarding the widespread price decline in chemical products in 2015, industry insiders believe this trend was reasonable. "Coal prices have been falling since 2012, dropping over 60%, and crude oil prices have been falling since the second half of 2014, also dropping over 60%. " Cai Yali noted that the price declines in coal and crude oil, as upstream raw materials, directly compressed the costs of downstream chemical products, leading to corresponding price drops in downstream products. However, the performance of each chemical product varied during the price decline.

　　After three consecutive years of decline from 2011 to 2014, PTA's production profit margins were completely squeezed, leaving no further room to fall in 2015, and the price fluctuated around the cost. The decline in olefins, however, was due to 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 simply the elimination of high profits during a period of capacity expansion for olefins. Currently, the average profit from olefin production is around 1500 yuan/ton.

　　“The olefin price spread structure is high in the near term and low in the distant future, with distant months in a high backwardation, indicating that during the period of 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, the following projects are also planned to start up: Zhongmei Mengda 600,000 tons, Jiangsu Shenghong 1.2 million tons, Changzhou Fude 330,000 tons, Better 300,000 tons, Salt Lake Group 1 million tons, Zhongtian Hechuang 1.37 million tons, and Jiu Tai Energy 600,000 tons of olefin capacity. "Capacity expansion is usually accompanied by shrinking profits. In the mid-to-late stages of capacity expansion, prices will fall back to near cost levels. From this perspective, there is still room for a further decline in the distant future olefin prices." said an industry insider.

　　“In the context of weak demand, there are more opportunities to short high-profit industries. For example, in the PP industry, the current profit from oil-based PP production is 500 yuan/ton, which has already been compressed by more than 1000 yuan/ton, but there is still room for further compression in the future,” said Gao Jianming.

　　What caused the market disruption?

　　“The price drop in chemical products was not unexpected, but the speed of the decline exceeded market expectations. The market for chemical products in 2015 was challenging. " A senior industry insider told Futures Daily that the reason for the "strange" market in the second half of 2015 lies in market expectations.

　　The global financial turmoil caused by the Chinese stock market crash triggered concerns about an economic crisis, leading to large-scale destocking across all sectors of the real economy. Under such circumstances, commodity price drops were inevitable.

　　As discussed in the market, the rapid decline in chemical product prices stemmed from "shorting profits." The sharp drop in international oil prices led to a significant increase in the profits of chemical products, particularly polyolefin products.

　　“With almost all commodities suffering losses, the huge profits in polyolefin products were incomprehensible and unacceptable to commodity investors,” said the industry insider. As long as there are profits in a commodity, funds will not hesitate to short it. Polyolefins and related products were, to some extent, "sacrificial victims" of this sentiment.

　　In fact, many factors influence chemical product prices, the most important being 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, although cost can sometimes affect supply and demand. For example, in 2015, PTA entered an oversupply stage, with prices continuously falling, significantly reducing profits at all levels of the industrial chain, and even resulting in losses. Under such circumstances, the industry itself entered a capacity elimination cycle, with some outdated capacity shut down, thereby affecting the equilibrium price.

　　In terms of cost, the price of US crude oil fell from $62.58/barrel to $34.53/barrel in 2015, a 44.8% drop. The impact of the cost collapse on chemical products is imaginable. However, currently, chemical product raw materials show a trend of diversification.

　　“The large-scale production of coal-to-olefin plants means that crude oil is no longer the only cost factor to consider. The operation of PDH plants also has an additional impact on polypropylene; natural gas and coal prices determine the high and low of methanol costs, while the impact of oil prices is relatively weak; oil prices remain the key factor determining PTA costs.” Pan Zeng’en analyzed.

　　In 2015, there was a saying in the market that "trading in chemical products could easily lead to complete losses." This is not an exaggeration. In 2015, both small investors and industrial customers experienced an unprecedented market correction.

　　Industry insiders believe that the "market correction" is related to incorrect judgments about supply and demand in the market. Especially for demand, once a misjudgment is made, the consequences can be disastrous.

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

　　Reporters learned that for a period of time, chemical products have been mainly destocking. The futures crash at the end of June 2015 led to a deterioration in the cash flow of PTA factories. To cope with the crisis, PTA factories led 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 gap has been formed, and the price of PTA has weakened again.

　　In terms of polyolefins, it has been in the destocking phase 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 the price reduction space is large, which in turn drags down the particles. "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 1,000 yuan/ton to 2,000 yuan/ton." Cai Yali said.

　　As for the decline in methanol prices, the main reason is that demand growth is less than expected. "Many methanol-to-olefin plants planned to be put into operation in 2015 were shut down or delayed due to various reasons, and the expected growth of new demand continued to be frustrated. At the same time, traditional downstream demand is sluggish, the real estate industry is increasingly sluggish, formaldehyde demand is gradually shrinking, and dimethyl ether is also sluggish 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, explain why its price has fallen.

　　Playing the "bottom game" in an interconnected way

　　In 2015, the operation of chemical products was full of woes. For the new game in 2016, 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 changes in the profit pattern of the industrial chain.

　　In the polyolefin market, it is expected that 2 million tons of new PE plants and 2.8 million tons of new PP plants will be put into operation in 2016, leading to oversupply of polyolefins.

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

　　Similarly, in Cai Yali's view, during the process of capacity expansion, olefin profits will continue to be squeezed, and the price center will also move further down. "Propylene supply has been oversupplied, and domestic propylene-only MTP and PDH plants are all losing money. Many small MTP plants in Shandong, such as Shuguang Luqing, Ruichang Chemical, and Lushengfa, have been shut down for a long time. Among PDH plants, Wanhu, Weixing, and Sanyuan have also been temporarily shut down. In 2016, the operation of propylene-only plants will reduce the downward pressure on propylene prices. Overseas polyolefin expansion is mainly focused on polyethylene. In 2016, nearly 2 million tons of capacity will be put into operation in North America." Cai Yali believes that the future downward trend of polyolefin prices will be mainly driven by the decline of polyethylene, and the price difference between PE and PP will narrow. It is expected that the price range of LLDPE in 2016 will be 6000-8500 yuan/ton, and the price range of PP will be 5000-7000 yuan/ton.

　　In the PTA market, due to the thorough depletion of profits in the industrial chain and the fact that the industry has entered a passive capacity reduction state in 2015, about 20% of the capacity is currently shut down for a long time (excluding the 4.5 million-ton plant currently shut down by Xianglu Petrochemical), and the industrial chain is basically in a state of supply and demand balance. Under this pattern, the trend of PTA prices in 2016 will be driven by profits. Specifically, the price difference between PX and naphtha and the dynamic processing fee of PTA will become important indicators of market trends. Industry insiders generally expect that PTA will fluctuate between 4000 and 5500 yuan/ton in 2016.

　　As for the methanol market, the current profits of manufacturers are meager, but not to the point of loss. The current low price will not stimulate the restart of shut-down natural gas plants. Methanol-to-olefin plants in the northwest region are profitable, while those in East China are on the verge of loss. The overall supply and demand in the market is weakly balanced.

　　"However, due to the suppression of olefins, the methanol market will have little exciting performance in 2016, and the price range is expected to be 1500-2000 yuan/ton." Industry insiders said.

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

　　"The slow global economic recovery in 2016 will bring about a demand increase of 1 million barrels/day. The growth in demand is slowly consuming the surplus supply, but the situation of oversupply is difficult to change." Wang Guangqian, an analyst at Dongwu Futures, said that against the backdrop of the Federal Reserve's interest rate hike, international oil prices will remain low before mid-2016, and then rebound after the peak season of demand and the boost from the reduction in production by high-cost crude oil producers or OPEC. It is expected that the WTI crude oil fluctuation range will be 30-55 US dollars/barrel, and the Brent crude oil fluctuation range will be 35-60 US dollars/barrel.

　　In addition, industry insiders remind that when playing the "bottom game", some risk factors need to be paid attention to. The most important one is the change in the direction of national macroeconomic policies, which will affect prices through the expectation of demand. The trend of the US dollar is also a focus of attention. The pace of interest rate hikes by the Federal Reserve 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 necessary to pay attention to the impact on the supply side caused by the deviation between the actual commissioning progress and the expected progress of the overhaul plan of the existing plants and the new plants.