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2010-11-30
After the rollercoaster like changes in H1 Nov, polyester market has been looking for a new reasonable level amid sound fundamentals and tightening macroeconomic policies. In the second half of last week, rigid demand emerged temporarily after PTA, MEG contracts were settled. But the industry did not rebound as a whole. On the contrary. prices continued to move down and dropped below previous underpinning point. After the violent fluctuations in Nov, where will the market going next? In the paragraphs below we analyse the main factors that affect the market trend: macroeconomic policies and the running rates in downstream textile market.
1. November CPI is expected to be high, putting pressure on regulation. Market will still be under tightening policy.
First, funds outstanding for foreign exchange surges to 30-month high, up 79.27% m-o-m; Gov may raise deposit reserve ratio further.
According to Bank of China's data published on Nov 26, the Oct new funds outstanding for foreign exchange reached as high as 519.047 billion RMB, hitting 30-month high, up 79.27% from Oct. Recently, US's Quantitative Easing Money Policy greatly accelerated global cash liquidity. Expectation of RMB appreciation and higher interest rate attracted the flow in of hot money. The economist of Industrial Bank, Mr. Lu, said Bank of China has to find ways to deal with the excess liquidity. "The direct reason for the Bank to raise deposit reserve ration for two times in Nov is to cut the huge funds outstanding for foreign exchange. If the funds keep surging at such pace, Bank of China may raise deposit reserve ratio further by 1.0-1.5%."
Secondly, it is expected that the growth of Nov CPI may reach new highs since this year
There is strong inflation expectation since prices of food, meat, poultry and related products keep inching up. Nov CPI may refresh new highs but it is not likely to surpass 5%. Dec CPI may drop 1 percentage point since carryover effects will completely disappear, thus the increase of Nov CPI may be the highest this year, which is anticipated at 4.7% and inflation risks are still obvious. In Nov, China's central bank kept raising deposit reserve ratio but nominal interest rate is still likely to climb up later.
Thirdly, China Gov take measures to stabilize prices and curb market speculation
Firstly, State Council announced 16 measures to curb price hikes, focusing on lowering the circulation cost; Secondly, CBRC stressed to take strict precautions against hot money speculation on agricultural products; Thirdly, People's Daily has published five articles to discuss price and stated the necessary policies to control price
Fourthly, the Central Economic Working Conference will be the market focus
The Central Economic Working Conference will be held recently, including macro-economic growth rate in 2011, inflation goal and fiscal policy. China macro economic is still in reviving stage and future policy is suppose to target on promoting increases, controlling inflation and adjusting structure.
As specuative activities were constrained by the expectation of continous tight policies, polyester market slumped after previous surge. In the short term, traders and plants were both cautious in operations after abtaining considerable profits previously. Without the participance of funds, the sentiment in PTA spot and futures markets became dull. As policies are unlikely to change in the short term, the market is not expected to fluctuate greatly or rebound.
2. Impact on downstream market from slack season and great PFY price fluctuation began to emerge, downstream O/R kept declining
The great fluctuation on PFY prices in Nov cast negative impact on downstream market, disturbing downstream offtake pace and operating balance. Hard to transfer high cost to their customers, downstream market entered a slack season in advance. According to our survey, downstream O/R kept declining. Due to unfavorable offtake in circular knitting plants of Xiaoshan, Shaoxing and Changshu, plus power ration in Haining, CCF Jiangsu & Zhejiang looms operating rate index dropped from 75% on Nov 1 to 66%. In Xiaoshan/Shaoxing, O/R of circular knitting machines dropped to about 30% and Haining weaving machines down to 85%. Run rates of Shengze water jet looms maintained at 75%. In Changshu, O/R of circular knitting machines decreased to 30-40%, weaving machines at 50-60% and twisting machines at 70-80%. Circular knitting machines in Fujian/Guangdong were running with a rate of 40-50% with weaving plants at 50-60%.
3. Under rising inventory and lucrative profits, PFY downtrend accelerated
PFY sales ratio maintained low since last weekend and inventory in PFY plants kept building. The downward movement of PFY prices in major Jiangsu/Zhejiang market speeded up. High prices in Wuxi, Shengze and Taicang decreased by 1000-1500yuan/mt, Tongxiang PFY prices down 300-500yuan/mt and Xiaoshan/Shaoxing PFY prices down about 500yuan/mt. Lack of support from upstream cost and downstream demand, PFY prices and profit may keep declining.
With the expectation of tightening monetary policy, weakening textile market and squeezed profit of PFY, although PTA spot supply and demand remain healthy, we still believe the market will edge down. As we expected before, PTA and MEG prices have stepped down after Nov contracts were settled. Although the profit-taking of traders slowed down and some traders even expected short-rebound after PTA and MEG prices are dipping close to 9000yuan/mt and 8000yuan/mt, low inventory is till a wise choice before market environment trends stable.
source:CCFGroup.com
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