Cost support underpins the bottom, while PE remains volatile at high levels awating a breakthrough

Cost support underpins the bottom, while PE remains volatile at high levels awaiting a breakthrough.

Introduction: this week the PE market saw an overall upward shift in price levels, supported by strong cost-side fundamentals and temporary tightening on the supply side. However, downstream demand has recovered slowly, and resistance to high prices persists, leaving the market stuck in a stalemate at elevated levels-unable to rise further but also reluctant to fall significantly. In the short term, multiple positive factors are providing support, but a breakout higher will still require new momentum. 

First. Cost side: geopolitical risk premium returns, high oil prices push up PE costs.

International oil prices rose amid volatility this week, driven by ongoing concerns over Middle East supply. Current LLDPE prices are narrowly fluctuating between 8000 and 8800 yuan per ton, supported from below by crude oil cost bottoming out, while demand from agriculture films remains at a year-low level and packaging demand is limited to just essential needs, constraining upward movement. As of August 12, the average price of LLDPE film was approximately 8230 yuan per ton, up by about 250 yuan per ton from the previous period. However, the price increase was primarily driven by cost and market sentiment rather than demand. After traders quoted higher prices, end users only made small purchases as needed, and actual transaction still required concessions to be finalized.  

Second. Cost side: crude oil prices remain volatile at high levels, with cost pricing still carrying significant weight.

In August, international oil prices ended the one-sided upward trend seen in July, with WTI fluctuating between $78 and $82 per barrel and Brent between $83 and $87 per barrel. Shipping traffic through the strait of Hormuz remains low, US-Iran negotiation have yet to break deadlocks, and geopolitical risk premiums have not fully dissipate. Margin for oil-based LLDPE swung widely between 80 and 750yuan per ton, with cost factors still accounting for over70% of PE pricing. Additionally, a week RMB exchange rate combined with high freight costs continue to suppress arbitrage opportunities for imports. Middle eastern supplies are begin diverted to European and American markets, resulting in lower arrivals in China and providing some reserves support to domestic spot prices. 

Third. Supply Side: Maintenance Resumes Gradually, New Capacity Approaching Full Output

This week, PE production was approximately 664100 tons, with a capacity utilization rate of 78.69%, slightly recovering from the peak maintenance period in July. In August, planned maintenance operations are limited, and previously shut down facilities at Guangdong petrochemical, Yanan Energy & chemical, and Dushanzi petrochemical have gradually resumed operation, leading to a sequential increase in industry supply. The main pressure for increased supply comes from new capacity coming online: two 450000-ton/year full density units at Tarim petrochemical’s Phase II project began feeding materials in July and officially started output in August, adding about 80,000 tons per month to commercial supply. Total new domestic PE capacity in the second half of the year is expected to reach around 6.3 million tons annually, with projects such as Shandong new Era and Sinopec Zhongshan Gulei scheduled to start up successively between October and November, meaning most of the additional capacity will be released in the fourth quarter. In the short term, increases in supply of domestically produced linear and injection-grade resins are already clear starting late August. 

Fourth. Demand side: Agricultural film demand is slowly recovering, but overall production levels remain low.

This week, the overall operating rate of downstream industries for PE was approximately 35.15%, a slight increase of 0.48 percentage points compared to last week, but is expected to decline by 0.29 percentage points in the next period. In terms of agriculture films, the overall operating rate increased by 1 percentage point compared to earlier, but the pace of order fulfillment for greenhouse films remains slow, and the recovery in production is weaker than in previous years during the same period. Mulch film production is in its off-season, with only a few companies seeing slight improvements in operations due to bidding orders. In some regions, greenhouse film production is gradually entering the order backlog phase. Although output growth has fallen short of expectation, companies demand for raw material has increased, leading to a slight rise in raw material inventory days. In the medium to long term, polythene demand is expected to increase in September and October, with greenhouse film product demand showing a notable improvement compared to the second quarter. 

Fifth. Outlook: short-term resilience remains, while medium-term focus shifts to supply-demand turning points

Overall, the PE market in August maintained a high-end range-bound pattern supported by cost underpinnings and low inventory levels, although the upward momentum lacked effective demand- side support. On the supply side, restarted maintenance units and new capacity coming online led to a steady recovery in domestic supply. On the demand side, agriculture film usage was slowly recovering,  but substantial volume growth will have to wait until the peak season kicks in during September. In the short term, LLDPE price are expected to continue fluctuating within a narrow range. Medium-term,  as agriculture film seasonal, procurement begins and pre-festival packaging demand emerges, the market may see a temporary bullish trend. However, upside potential will be constrained by the gradual realization of increased supply.