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

In 2015, for bulk commodities, it was simply a disastrous year. The black and non-ferrous metals industries suffered greatly, with market prices plummeting. In the midst of this downturn, chemical products were also affected. Except for PTA, which held its ground, the polyolefin 'brothers' and methanol experienced a near 'halving' in price.
　　According to statistics compiled by Futures Daily reporters, among chemical products, PTA prices fell 24% from their year's high, while the other three varieties saw declines of over 30%. Taking two of the most severely impacted varieties as examples, polypropylene's year's high was 9027 yuan/ton, and its low was 5361 yuan/ton, resulting in a cumulative decline of 41%. Methanol fell from a year's 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 Hairong Investment, believes that chemical products generally reached their yearly high point at the end of April and entered a downward trajectory in early May. The most dramatic declines were seen in the 'olefin' brothers and methanol, whose 'severity' is reflected in the market fluctuations.
　　PP, as the twin brother of LLDPE, experienced a severe squeeze on profit margins in the fourth quarter of 2015, due to ample supply. "Beyond its own oversupply, there was a sharp drop in propylene monomer prices to 3800 yuan/ton, causing a collapse in costs, and a large price difference between granular and powdered materials, with better profit margins for powdered materials and greater room for price reductions, resulting in PP granular material prices remaining unstable, with minimal upward pressure from downstream demand." said Gao Jianming.
　　Compared to polyolefins, the price drop in methanol was noticeably delayed. It could be said that the rise of methanol-to-olefin technology has closely linked methanol and olefins. "Most plants purchase methanol externally, increasing methanol demand on the one hand and olefin supply on the other. Methanol and olefins have a clear linkage effect, but whether it was the sharp drop at the end of 2014 or the decline that began in July 2015, methanol prices always lagged behind olefins." said Cai Yali, a securities analyst at Zhongyuan Futures.
　　Regarding the overall price decline in chemical products in 2015, industry insiders believe this trend is logical. "Coal prices began to fall in 2012, with a decline exceeding 60%, and crude oil prices have fallen since the second half of 2014, also exceeding 60%. " Cai Yali notes that the price drops in coal and crude oil, as upstream sources, directly compressed the costs of downstream chemical products, making the downstream price drop a natural consequence. However, each chemical product showed different performance during the price decline.
　　After three consecutive years of decline from 2011 to 2014, PTA's production profit margins were completely squeezed, leaving no room for further price drops in 2015, with prices fluctuating around the cost level. The decline in olefins, however, was due to the enormous profit margins left behind after the collapse of 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 produced from naphtha was 2500 yuan/ton. The price drop 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 olefins production is 1500 yuan/ton.
　　“The olefin price spread structure shows a pattern of higher near-term prices and lower longer-term prices, and the further months are in a high backwardation, indicating that during the period of capacity expansion, capital is still shorting olefin profits,” said Cai Yali.
　　In December 2015, Shenhua Yulin's 600,000-ton MTO plant went into operation. In 2016, a number of other olefin production facilities are also planned to be launched, including China Coal 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). “Capacity expansion is generally accompanied by shrinking profits. In the later stages of capacity expansion, prices will fall back to near cost levels. From this perspective, there is still room for further decline in future olefin prices,” a certain industry insider believes.
　　“With weak demand, there are more opportunities to short in high-profit industries. For example, in the PP industry, the current profit from oil-based PP production is 500 yuan/ton, already compressed by over 1000 yuan/ton, but there is still room for further compression in the future,” Gao Jianming stated.
　　What caused the disruption of the market?
　　“This round of price declines in chemical products was not unexpected, but the speed of the decline exceeded market expectations. The market for chemical products in 2015 was difficult to navigate, making operations quite challenging.” A senior industry insider specializing in chemical products told Futures Daily reporters that the reason behind the “bizarre” market in the second half of 2015 was market expectations.
　　The Chinese stock market crash, which led to global financial turmoil, triggered concerns about an economic crisis, prompting large-scale destocking across all sectors of the real economy. Under these circumstances, commodity price declines were inevitable.
　　As discussed in the market, the rapid decline in chemical product prices stemmed from “shorting profits.” It is understood that the sharp drop in international oil prices resulted in significantly higher profits for chemical products, especially polyolefin products.
　　“With almost all commodities collapsing, the fact that polyolefin products could be described as having windfall profits was incomprehensible and unacceptable to commodity investors,” the aforementioned industry insider said, adding that as long as a commodity has profits, there will be funds willing to short it, and polyolefins and related varieties were to some extent “sacrificial victims” of this mindset.
　　In fact, for chemical products, there are many factors affecting price, the most important being supply and demand and cost. In the view of Pan Zeng'en, an analyst at Everbright Futures, chemical product prices are determined by supply and demand, not cost, but sometimes cost can have a counteracting effect on supply and demand. For example, in 2015, PTA entered a stage of oversupply, leading to a continuous decline in prices, a significant contraction in profit margins across the upstream, midstream, and downstream of the industry chain, and even losses. Under these circumstances, the industry itself entered a capacity elimination cycle, with some old capacity being shut down, thus affecting the equilibrium price.
　　In terms of cost, in 2015, U.S. crude oil fell from $62.58/barrel to $34.53/barrel, a drop of 44.8%. The impact of this cost collapse on chemical products is conceivable. However, the raw materials for chemical products are currently showing a trend 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; the prices of natural gas and coal determine the cost of methanol, while the impact of oil prices is relatively weak; oil prices remain a key factor in determining the cost of PTA.” Pan Zeng'en analyzed.
　　In 2015, a saying circulated in the market: "Trading in chemical products, if you are not careful, you will lose everything." This is not an exaggeration. In 2015, both small investors and industrial customers experienced an unprecedented market washout.
　　Industry insiders believe that the "severe market washout" is related to inaccurate judgments of supply and demand in the market, especially regarding demand. If the assessment of demand is incorrect, the consequences can be disastrous.
　　Regarding supply and demand indicators, we need to pay attention to the progress of new production capacity commissioning, the operating status of existing production capacity, and seasonal factors of demand." Pan Zeng'en said.
　　Reporters learned that for a period of time, chemical products have been mainly destocking. The futures plunge at the end of June 2015 led to a deterioration in the cash flow of PTA factories. 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 rebound in supply and weakening demand, a supply-demand scissors gap has formed, and PTA prices have weakened again.
　　In terms of polyolefins, the market has been in a destocking phase since after the National Day in 2015, but prices have not strengthened. The main reason is that the profit of powder materials is good, and there is a large room for price reduction, which in turn drags down the price of granular materials. "Due to the substitution of powder materials and the weak downstream demand, after October 2015, the decline in PP was greater than that of LLDPE, and the price difference between the two increased 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 less than expected. "Many methanol-to-olefin plants planned to be put into operation in 2015 were limited by various reasons and were shut down or delayed. Expectations for growth in new demand continue to be dashed. At the same time, traditional downstream demand is sluggish, the real estate industry is becoming increasingly bleak, formaldehyde demand is gradually shrinking, and dimethyl ether has also been hit hard by the plunge in oil prices." Gao Jianming believes that the above factors, coupled with the fact that methanol supply has not decreased, make it reasonable for its price to decline.
　　Playing the "bottom game" in a chain reaction
　　In 2015, chemical product operations were disastrous step by step. In the new game of 2016, careful layout is particularly important.
　　Industry insiders generally believe that in 2016, we need to focus on 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 plants and 2.8 million tons of new PP plants will be put into operation 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 lose profits. Based on the current prices of crude oil and coal, the profit of PE production is still considerable, and the PE price will fall in a fluctuating manner in the later period. For PP, its overall trend is similar to PE, but under the current price, the PDH plant has suffered serious losses, and the profits of coal-based and oil-based plants are also under pressure. If the plant is shut down, the price may rebound temporarily." Pan Zeng'en said.
　　Similarly, in Cai Yali's view, during the expansion of production capacity, olefin profits will continue to be squeezed, and the price center will further shift downward. "The supply of propylene has been oversupplied, and domestic propylene-only MTP plants and PDH plants are all in a state of loss. Many small MTP plants in Shandong, such as Shuguang Luqing, Ruichang Chemical, and Lushengfa, have been shut down for a long time. Among the PDH plants, Wan Hua, Weixing, and Sanyuan have also been temporarily shut down. In 2016, the operation of propylene-only plants will reduce the 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 downward trend of polyolefin prices in the future will be mainly due to the decline of polyethylene, the price difference between PE and PP will narrow, and it is expected that the LLDPE price range in 2016 will be 6000-8500 yuan/ton, and the PP price range will be 5000-7000 yuan/ton.
　　In the PTA market, due to the thorough de-profit 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 plants currently shut down by Xianglu Petrochemical), and the industry chain is basically in a state of supply-demand balance. Under this pattern, the trend of PTA prices in 2016 will be dominated by profits. Specifically, the price difference between PX and naphtha and the dynamic processing fee of PTA will become important indicators for market trends. Industry insiders generally predict that PTA will fluctuate between 4000 and 5500 yuan/ton in 2016.
　　As for the methanol market, the profits of current producers are thin, but not to the point of losing money. The current low prices will not stimulate the restart of shut-down natural gas plants. Methanol-to-olefin plants in Northwest China are profitable, while those in East China are on the verge of losses. The overall supply and demand in the market is weakly balanced.
　　"However, under the pressure of olefins, the methanol market will not 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 barometer of the chemical product market in 2016.
　　"The slow recovery of the global economy in 2016 will bring a demand increase of 1 million barrels/day. The growth in demand is slowly consuming the excess supply, but the oversupply situation is difficult to change." Wang Guangqian, an analyst at Dongwu Futures, said that against the backdrop of the Fed's interest rate hike, international oil prices will hover at a low level before mid-2016, and then rebound after the peak demand season and the increase in production reduction by high-cost crude oil producers or OPEC's production reduction. It is expected that the WTI crude oil price will fluctuate between 30 and 55 US dollars/barrel, and the Brent crude oil price will fluctuate between 35 and 60 US dollars/barrel.
　　In addition, industry insiders remind that when playing the "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 demand-side expectations. The trend of the US dollar is also a key focus. The pace of the Fed's interest rate hikes 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, we need to pay attention to the impact of the deviation between the planned overhaul of existing plants and the actual commissioning progress of new plants on the supply side.
Website statement: All articles reprinted from other media on this website are for the purpose of conveying more information, and do not represent the agreement of this website or its responsibility for their authenticity.