[Bulk Commodities] Global chemical capacity is oversupplied, so why are product prices soaring?
But if imports recover, domestic output rises, and port inventories increase for several consecutive weeks, then the most important logic behind the earlier rally will change. From that angle, port inventories and spot basis may signal a turning point in this market cycle faster than international oil prices.
Why are product prices soaring while downstream operating rates are falling? This is the most critical question for judging the nature of this rally. If this were a typical chemical demand bull market, you'd normally see terminal orders rising, downstream operating rates increasing, inventories falling, product prices rising, and profits along the chain gradually improving. But the current data don't show that. Data from Longzhong Information shows that in August, China's polyester industry output was about 6.308 million tons, down 2.29% month-on-month and 6.18% year-on-year; the monthly average capacity utilization rate was 77.59%, down 2.28 percentage points month-on-month and 8.88 percentage points year-on-year. On one side, ethylene glycol futures have risen more than 45% from their early July low; on the other, output and operating rates in its largest downstream industry, polyester, are both falling. This shows that the core driver of this ethylene glycol rally is not a sudden improvement in downstream demand, but supply falling faster than demand.
That distinction matters a lot. Demand-driven rallies and supply-driven rallies both end up as price increases, but their sustainability is completely different. In a demand-driven rally, downstream order growth can absorb costs, companies raise operating rates, and profits along the chain can improve together. A supply-driven rally has a built-in self-limiting mechanism. After raw material prices rise, if downstream products can't raise prices in step, processing margins shrink; as losses widen, downstream companies start cutting production; downstream cuts then reduce demand for upstream raw materials, eventually pushing inventories back up. This negative feedback is already showing up. Longzhong monitoring shows that one important reason polyester output and capacity utilization fell in August was tight raw material supply and excessive cost increases; apart from filament yarn, some polyester products saw worsening losses, and bottle chip and staple fiber producers cut output to repair processing fees.
The methanol chain faces the same problem. As methanol prices rise, the raw material cost for methanol-to-olefins plants rises sharply. If downstream products like polyethylene and polypropylene don't rise in step, methanol-to-olefins margins come under pressure and plants have to cut operating rates. The feedback chain of a supply-driven rally: supply contraction pushes raw material prices up, raw material price increases squeeze downstream profits, downstream production cuts lead to falling demand, which in turn leads to rising raw material inventories. Once the negative feedback forms, the force pushing prices up gradually weakens and then disappears.
The 'Golden September and Silver October' peak season doesn't prove the price uptrend will continue. After September and October, what needs to be verified is whether terminal order volumes and downstream profits can improve. If downstream operating rates pick up, it means high-priced raw materials still have demand, and this rally may shift from supply-driven to a supply-demand resonance. If downstream operating rates keep falling after raw material prices rise, then high-priced raw materials will become the biggest pressure on the market. So what really determines how this chemical rally plays out is not how much further crude oil prices can rise, but how much longer downstream can hold on.
Comments
0