Plastic rally will turn to a strong concussion phase

The plastics market is entering a new phase, transitioning from a rebound fueled by tight supply and demand dynamics to a more volatile oscillation period. After a weak start to the year, the sector saw a rally in December as overall market conditions improved, with plastics leading the recovery. However, recent days have seen a sharp decline in prices, with the main contract experiencing three consecutive negative sessions, barely holding above the 10-day moving average. The Federal Reserve’s fourth round of quantitative easing (QE4) was largely expected, aiming to purchase long-term Treasury bonds and extend the maturity of its holdings to lower long-term yields. While the $45 billion program is not expected to inject significant liquidity into the market, it has still influenced commodity prices. Crude oil and gold, for instance, saw sharp declines following the announcement, signaling that markets are still sensitive to central bank actions. Crude oil fundamentals remain the key driver of price movements. Despite the Fed's efforts, the marginal impact of QE on oil prices is diminishing. OPEC’s decision to maintain output at 30 million barrels per day met market expectations, but global demand has not recovered significantly. In the U.S., rising domestic production and increased supply from Sudan and South Sudan have kept the market in a surplus state, suppressing short-term oil prices. Meanwhile, the fiscal cliff remains a concern, though we expect a last-minute resolution. Plastics have been under pressure due to high inventory levels from last year and a surge in new capacity this year. The market sentiment has been extremely bearish, with a long-term inverted price structure and limited downstream buying. However, despite the pessimism, there hasn’t been a substantial drop in demand. Additionally, government policies to reduce petrochemical production have led to delays in new projects, which has helped keep supply in check. The Daqing plant accident created a supply gap of around 100,000 tons, and while new projects like Qilu and Fushun are gradually coming online, the psychological impact of the outage has been significant. This has provided an outlet for long-term bulls, contributing to the recent market rally. With the agricultural film season approaching in the northeast, downstream processing plants are preparing for production, which will further tighten the supply situation. Although prices have risen, demand remains relatively inelastic due to the essential nature of agricultural films. As a result, we expect supply-demand tensions to intensify in the near term. LLDPE prices have recently climbed above 11,000 yuan, matching current spot prices. However, the spot market remains calm, with no significant price increases observed. This suggests that the upward momentum may slow down, especially with the upcoming reserve season. A rapid rebound is unlikely, but steady growth is still possible. In summary, the current LLDPE market is characterized by clear bullish and bearish factors, with supply-demand imbalances set to dominate in the near future. Under the pressure of weak crude oil prices and narrowed spreads, the market is likely to remain in a strong oscillation phase. As long as prices stay above the 60-day moving average, the bullish trend can continue. But if they fall below that level, the market could shift into a more volatile range.

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