Starting in mid-October, international crude oil prices began another sharp upward trend, with futures jumping from around $85 per barrel to over $98 in just a few weeks. However, by late November, the market reversed course, and prices have since dropped back to about $88 per barrel. Over the past two years, global oil prices have had a major influence on the plastic raw material market. In particular, during 2006, the prices of plastic raw materials closely followed fluctuations in oil prices. This time, however, despite a steep drop in oil prices within just two months, the plastic market has shown little reaction.
Liu, a manager at a plastics company in Dongguan, Guangdong, told reporters, “Our profits this year are very low because raw material costs are too high.†The company mainly produces Christmas trees for export. “Customers refused to accept higher prices, so we continued taking orders just to keep them. As a result, our profits are extremely low. With such high raw material prices, we can only buy and use them. Because of the low margins, we're planning to take more holidays next spring festival.â€
This situation reflects what many small and medium-sized plastic companies in China are facing today: inability to raise product prices, leading to low profits, forced production cuts or shutdowns, and ultimately reduced demand for raw materials. Weak downstream demand is significantly impacting the plastic raw material trading market. Price volatility has become the norm, and traders often describe the market as “light trading.†This condition has persisted for nearly two years now.
From mid-2005 to early 2006, plastic raw material prices surged by over 30%, causing shortages for downstream companies. Then, starting in April 2006, driven by large domestic petrochemical firms, prices of various plastic raw materials rose sharply. By July, they had increased by 10% to 20%. International oil prices were also rising during this period. However, by October, prices fell again due to limited downstream capacity. Since then, the market has remained relatively stable, with no major swings—“peak season doesn’t bring price hikes, and off-season doesn’t bring big drops.†So far, there haven’t been any dramatic fluctuations.
When oil prices rose in October this year, just as the agricultural film production season began, traders were hopeful for a small price increase. But the weak response from the downstream market has dashed those expectations. “We don’t dare to take positions; customer purchases are actually limited,†said Mr. Mao, a trader in Yuyao with nearly five years of experience in the plastic raw materials business.
According to reports from interviews, some large agricultural film producers stock up on materials during peak seasons. However, with CNPC and Sinopec implementing regional sales policies, many large downstream companies can directly purchase from their sales branches, bypassing traders. Meanwhile, the traders’ main customers—small and medium-sized plastic product companies—are struggling financially and mostly follow the market, resulting in low transaction volumes overall. This decline in trading activity has made the impact of crude oil prices on the market almost negligible.
In general, sluggish downstream demand and resistance to high prices should lead to lower market prices. However, since October 2006, plastic raw material prices have remained relatively stable. Strong ex-factory prices from PetroChina and Sinopec are a key factor supporting the high cost of raw materials, and high oil prices are one reason manufacturers are reluctant to cut prices. This has created a tug-of-war between supply and demand. Facing weak demand, upstream companies can only maintain the status quo. Under these conditions, the impact of international oil price fluctuations on the market is much less than it used to be.
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