The actual PE production capacity in 2017 may not be as expected.

　　2016 is a bull market for commodities. Plastic futures prices oscillated higher throughout the year. 1705 contracts hit a new high on December 12 and recently oscillated around 10000 yuan/ton. Although the production capacity of PE equipment has entered the intensive production period in 2016, due to the good demand, the overall trend of plastic prices is not bad, the low point is constantly rising, and the high point is constantly breaking through. Combined with the current PE market fundamentals, the author believes that the high point set by the later 1705 contract on December 12 may still be broken.

The actual PE production capacity in 2017 may not be as expected.

Capacity input is one of the factors that influence price movements, and more capacity input does not necessarily mean that prices will fall, sometimes on the contrary. In 2015, domestic PE new capacity was actually zero, but prices fell that year. In 2016, domestic PE plant production capacity will enter a period of intensive delivery. According to statistics, domestic PE production capacity will increase by 1.17 million tons in 2016, up 7.77 from the previous year. In 2017, the domestic plan is to add 2.37 million tons of new production capacity, an increase of 14.6 over the previous year. In terms of effective production capacity, it is expected to increase by 7.55 over the previous month. However, considering that the commissioning progress of PE plants in recent years is mostly lower than expected and postponement is more common, the actual production, the actual production capacity in 2017 may not be expected.

In 2016, more new production capacity was put into overseas PE devices, but overseas sources did not impact the domestic market. It is expected that domestic PE imports will decrease by about 9% in 2016, which is the first year-on-year decrease in PE imports since 2011.

The main reason for the decrease in import volume is the devaluation of RMB, the increase in import cost and the import loss. The author calculates that the import profit of LLDPE in 2016 is almost in a loss state. After October, as the devaluation process of RMB accelerates and increases, the import loss expands to 1000-1500 yuan/ton. We believe that the RMB will continue to depreciate in 2017, which will not be conducive to PE imports but will be conducive to PE exports, so the new capacity of PE in overseas markets will not significantly impact the domestic market.

PE downstream demand is improving overall

In 2015, while PE was limited in incremental supply, demand was declining, so overall prices fell. In 2016, the domestic macro-economy improved, and the overall downstream demand for PE improved. Therefore, although more new production capacity was put in in 2016, prices rose due to demand support. From the PE downstream end products production growth, the main products are picking up trend, January-November 2016 plastic film production growth from 3.4 to 6%, daily plastic products from 0.67 to 6.9.

The current macroeconomic indicators are generally good, and the economic situation has not changed much. From the perspective of the seasonality of downstream consumption of plastics, November to the Spring Festival is the reserve period for plastic film demand, and after the Spring Festival to March is the peak season for demand. Therefore, the late demand season has a certain support for plastic prices.

PE new material will increase the replacement of recycled materials.

In the first 10 months of 2016, domestic PE recycled material production decreased by nearly 500000 tons year-on-year, a decrease of nearly 12%. In the first 10 months of this year, imports of PE recycled materials decreased by 926300 tons, down about 45% from the same period last year. The supply of PE recycled materials has been greatly reduced, mainly due to the government's unprecedented efforts to rectify the environmental protection of the recycled materials market. The main waste plastic markets in North and East China have been hit hard, and a large number of recycled materials processing workshops have been shut down for several months or even shut down. In 2017, the national environmental protection efforts will not be relaxed, recycled materials will slowly withdraw from the market, the substitution of new materials for recycled materials will increase, and the demand for PE new materials will be enlarged.

From the perspective of the current plastics market, although there are unfavorable factors for the increase in supply caused by the intensive delivery of new production capacity, the actual effect of production capacity delivery may not be as expected. In the context of the overall steady rise in the macro economy, the downstream demand for PE has improved, and demand is the most critical variable that determines the price trend of plastics. The improvement in demand in 2016 was a clear driver of prices, and I am more bullish on the macroeconomy in the first half of 2017, with demand drivers still present and the possibility of 1705 contracts still hitting new highs.