Why the domestic TDI market rallied recently?
2020-05-14    [Source:PUdaily]

After the May-Day holiday, domestic TDI price rose sharply. On May 12, spot offer for Shanghai sources stood at RMB 10,800-11,000/ton DEL in drum with invoice included. That for Chinese sources stood at RMB 10,500-10,600/ton DEL in drum with invoice included. In South China, offer for Shanghai sources stood at RMB 10,800-11,000/ton; and that for Chinese sources stood at RMB 10,500-10,600/ton DEL in drum with invoice included. The following figure shows the movement of TDI price in the past month. As can be seen from the figure, from the middle of April to the end of the month, the overall TDI price remained flat and low. Whereas after the holiday, the price rose sharply by about 22%. There are several driving forces behind the price movement.


Fig.1 Movement of average TDI price

First, the worries about oil glut has eased. It has been nearly a month since April 20, when the oil prices collapsed. During this period, oil production dropped sharply. Data published by Baker Hughes on May 1 shows that the number of oil rigs in the United States decreased by 53 to 325, the lowest level since June 2016. As a result, investors' worries about the oil glut have eased. In addition, many governments have begun to lift their lockdowns, meaning the economy is likely to recover slowly in the short term. All this has led to a rebound in oil prices. On May 12, the closing prices for international crude oils were $25.78/bbl (WTI), up $1.64/bbl; $29.98/bbl (Brent), up $0.35/bbl; and $22.71/bbl (OPEC), up $0.5/bbl. The recovery in oil market has given confidence to participants in the chemical industry. Thus TDI manufacturers are also bullish on the market.

Fig.2 WTI crude oil price from 2019 to 2020

Second, TDI suppliers increased their offers and reduced supply. Wanhua Chemical announced a fixed offer of RMB 10,700/ton for the week from May 11 to 15, up RMB 500/ton from last week. Following that, Covestro raised its guide price to RMB 10,200/ton. Yantai Juli raised its fixed offer to RMB 10,500/ton. All this propped up the market. As BASF (Shanghai) plant malfunctioned in April and will undergo maintenance from mid-May, the manufacturer has decided to impose quota on its supply to meet the demands of core customers, and that the settlement price for May will not be lower than RMB 10,200/ton. Besides, Wanhua Chemical announced that it would delay the restart of the TDI plant acquired from Wanhua Fujian (formerly known as SEEC), also boosting the market confidence. Traders followed suit by increasing their spot prices.


As for downstream manufacturers, most of them are suffering high inventory levels. This is primarily because previously they went bottom fishing by purchasing large volumes of raw materials including TDI. The high inventories give them a bargaining chip. In the context of the COVID-19 epidemic, their current demand is only about 40-50% of its normal levels. Thus even if the suppliers attempt to raise the price, the buyers still make purchases sporadically due to their high inventories.


Looking ahead, in the short term TDI price will continue to rise due to support from the suppliers and speculation in the market. And dealers will follow suit by increasing their spot prices. But the price increase will meet buyers’ resistance, so the upward trend is likely to lose momentum. In the long run, the movement of TDI price is dependent on the recovery in demand from downstream sectors. The price may continue to rise if suppliers continue to limit their supplies to drive up the market, while downstream manufacturers deplete their inventories and see recovery in demands as the epidemic is brought under control. Otherwise, if downstream demands remain weak while supply becomes ample as maintenance of TDI facilities comes to an end, the price is likely to fall. 

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