Can PP market sustain upward momentum?

In July, PP futures have risen for 4 consecutive days, with an increase of nearly 300yuan/mt, while spot prices rises by nearly 200yuan/mt. However, at the current stage, the situation of high supply and weak downstream demand has not significantly changed. So, why PP market rises and can PP market sustain upward momentum?

There are two main reasons for the recent upward trend:

1. Cost:

Further production cuts by Saudi Arabia and Russia have sent bullish signals, and the peak season for fuel consumption in the United States has arrived, leading to an upward trend in international oil prices. Meanwhile, China domestic thermal coal and methanol also rises, with methanol prices increasing by 150yuan/mt in a week.

With the rise in raw material prices, the cost of PP has increased again, leading to a reduction in the previously improved cash flow. Currently, apart from PDH, which can still maintain profitability, the cash flow of other PP processes all face losses.

2. Policy

There have been numerous economic stimulus policies recently, indicating the authorities' willingness to stabilize risks and expectations. With multiple rounds of macroeconomic stimulus, market sentiment is strong, and funds are taking the lead, driving up PP futures prices. However, it is relatively difficult for spot prices to track the uptrend, leading to narrowing spot-futures basis.

Despite the price increase, market transactions remain weak. Downstream purchases on need, and most deals are mainly among speculators.

Looking ahead, the market outlook remains pessimistic.

Firstly, there is no substantial improvement in demand. Downstream prices are passively track the rise in raw material costs, and profit remains low.

Secondly, supply pressure is noticeable. On one hand, with the alleviation of cost pressures, plants shut for maintenance may decrease. On the other hand, new plants are expected to be put into production, with an expected additional capacity of 3.25 million tons/year in the third quarter, including 650kt/year already commenced in July, and an additional 2.6 million tons/year awaiting implementation.

Overall, the sustained upward trend driven by macroeconomic stimulus and rising costs raises questions about its sustainability, particularly in the absence of substantial improvement in downstream demand. There is a risk of a potential retreat, and traders are suggested to be cautious. However, if there is further intervention from macroeconomic policies in the future, there is also a possibility of continued upward movement.