Fundamental Upstream Analysis
1. Crude oil: OPEC production hit a historic high in early August, and market concerns about oversupply have intensified, leading to a sharp drop in oil prices. Major oil producing countries will restart talks on freezing production at the end of September to alleviate the current situation of oversupply. However, due to Iran's return to the crude oil export market and the bankruptcy of the Harbin freeze production conference at the beginning of the year, the hope of reaching a consensus at the end of September is slim, and the result is difficult to fundamentally alleviate the situation of oversupply of crude oil. Low cost oil producing countries led by Saudi Arabia have recently taken advantage of the periodic decline in crude oil prices to vigorously suppress US shale oil companies, forcing a large number of small and medium-sized oil companies to go bankrupt and reducing the impact of shale oil on the crude oil market. So, in the coming period, crude oil prices will maintain a low volatility pattern, operating between the average OPEC extraction cost of $40 per barrel and the average shale oil extraction cost of $50 per barrel in the United States. As a cost driven and demand driven product, PP is greatly affected by crude oil prices. In the future, due to the impact of low crude oil prices, PP costs will remain relatively low.
2. Operating rate: In August, the parking of domestic maintenance facilities was relatively concentrated, and due to the upcoming G20 summit in East China, there were restrictions on transportation in the surrounding areas. Supported by favorable market conditions, prices remained strong and high. The total domestic production capacity of PP is 18.445 million tons. As of the end of August, the operating rate has decreased to 84.5%, but has rebounded significantly from the low point of 60% in June. After the G20 summit, PP production capacity will be extensively restored. The 450000 tons/year PP plant of Shenhua Xinjiang Coal based New Materials Project is planned to be put into operation at September price, and the product will be supplied to the market around October, which increases the expected market supply. The centralized parking and maintenance equipment in the early stage will be restarted gradually after mid September, and there is a strong expectation of increased supply in September.
3. Inventory situation: Recently, the inventory of major domestic PP production enterprises and some intermediaries has slightly increased. As of the end of August, inventory in North China and East China has decreased, while in South China, due to factors such as the recovery of some petrochemical facilities, supply has increased, resulting in an increase in petrochemical inventory compared to the same period last week. According to tracking data from Longzhong, the inventory of major petrochemicals in China increased by about 0.6% compared to last week, and the inventory of major petrochemicals and intermediaries increased by 0.4% compared to last week This week, although the domestic PP market prices continued to revolve around the previous high level, downstream end-users showed significant production pressure, limited procurement and production, which to some extent dragged down market transactions. It is expected that there may still be a slight increase in inventory in the future.
4. Spot prices: In August, the domestic PP market prices continued to maintain a strong and slightly rising trend. At the end of this month, compared to the same period last month, the prices of copolymerization and wire drawing generally increased by 50-250 yuan/ton. However, some grades experienced significant declines due to equipment shutdown or production scheduling issues, with some experiencing significant increases, but the impact on mainstream product prices in the market was limited. This month, PP markets in various regions still showed a slight shortage of supply, as well as a slight increase in downstream terminal production enterprises' operating conditions and other favorable supply and demand support. High prices continued to maintain, but there were obvious signs of slowing down compared to previous months' gains. In addition, downstream procurement caution continued to increase, and transaction pressure continued to permeate the market atmosphere.
5. Production cost: Currently, the direct raw materials for producing PP mainly include naphtha, coal, methanol, propylene, and propane. Various raw materials correspond to different production processes, resulting in significant differences in the manufacturing cost of PP. As of mid July, based on the total production capacity of 18.4 million tons of PP in China and the proportion of different raw materials, the estimated social average production cost of PP is between 5600-5800 yuan/ton. However, the recent spot price of PP wire drawing material is between 7950-8600 yuan/ton, which is artificially high. With sufficient market supply, the spot price needs to be adjusted.
Fundamental downstream analysis
1. Demand side: Polypropylene wire drawing products are mainly used for the production of woven bags, colored strip fabrics (for shading or covering), carpet backing (base fabric), container bags, tarpaulins, and ropes. The products are mainly used for packaging of grains, fertilizers, cement, sugar, salt, industrial materials, and mineral sands. The demand elasticity for edible commodities such as grain, fertilizers, sugar, and salt is relatively small, while the demand elasticity for industrial products such as cement packaging related to real estate is relatively large. We mainly focus on the related demand driven by the real estate market for analysis. Recently, due to the regulatory policies of various local governments, the three major indicators of real estate have shown a downward trend, which is not conducive to continuing to support the subsequent market demand for packaging raw materials.
2. Downstream operating rate: Recently, the overall operating rate of the downstream polypropylene industry in China has been around 57.7%. The plastic weaving industry has a production rate of 58%, co injection molding has a production rate of 55%, and BOPP has a production rate of 60% In the early stage, the operating rate in the South China region was relatively low due to weather conditions, but now the operating situation of various manufacturers is good. Due to the impact of the G20 summit, the transportation of PP pellets in the East China region has been restricted. In order to ensure the "G20 blue" during the summit, both upstream and downstream factories have stopped or reduced production. The peak season operating rate in the market is around 70%. Based on the current situation, the overall operating rate has not changed much and is still relatively low. After the G20 summit in the follow-up market, the operating rate will soon be adjusted back, but the PP market supply will also be correspondingly abundant.
Technical analysis
1. Form: After the breakthrough of the PP main 1701 contract on August 24th, a triple top reversal pattern was formed, with significant upward pressure. According to the Elliott Wave Theory, the initial target level for a pullback is set at the 6737 line at 61.8%, and if it is reached, the position will be increased by 5%; The second target is set at 38.2% of the 6136 line, and if it reaches, an additional 5% will be added to the warehouse
2. Moving average indicator: After continuously falling below the short-term trend line, the K-line of the main 1701 contract has successfully broken through the 60 day moving average in the past two trading days, and the 5-day moving average has continuously fallen below the 10 day, 20 day, and 60 day moving averages, establishing a basic downward trend.
3. MACD indicator: DIF breaks through DEA to form a sell signal, the triple top on the K-line chart forms a slightly higher peak than the peak, while the MACD indicator is a green bar, indicating that the price is about to reverse at a high level.
Trading Strategy
The current price increase from late May to early July was driven by the black market and petrochemical costs, but there was no significant increase in downstream demand and no abnormal changes in inventory. The crude oil price will continue to fluctuate significantly due to the impact of news before and after the Algeria production restriction conference, but the possibility of reaching a production restriction resolution is extremely low. After the conference, the crude oil price will continue to operate at a low level. For cost driven demand driven products such as PP, they will face artificially high spot prices in the early stage. With no hope of cost increase, there is value in returning to demand. In August, some maintenance facilities in China were relatively concentrated in parking, and the centralized parking and maintenance facilities in early September will gradually restart after mid September, with strong expectations for increased supply in September. After the G20 summit in East China, transportation restrictions in the surrounding areas will be lifted, and supply will resume on a large scale. On a technical level, after the holiday breakthrough on August 24th, a strong pressure pattern of triple tops was formed, with greater pressure above. Taking a comprehensive analysis, PP will enter a downward cycle and participate in the operation with a short order trend strategy.
Risk control strategy
The trend strategy is based on the triple top pattern, with the stop loss point set at the high point of 7709 in the previous triple top. If it breaks through, all short positions will be stopped and eliminated.