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Tensions between the United States and Iran escalated after the death of Iranian commander Kasim Sulaimani in an attack by the US military on January 3, 2020. How will this event affect the polypropylene market in 2020?

The impact of this event on PP market mainly depends on the reflection of crude oil market. In addition to cost factors, crude oil as the source of bulk commodities, the continuous rise and fall of crude oil and chemical products have a strong linkage. Conventional geopolitical risks are short-term drivers of crude oil, while geopolitical risks and even wars have a substantial impact on crude oil supply and demand, which is the long-term driving logic. At present, Zhuo Chuang's point of view is still not looking at large-scale wars, and has not yet caused supply disruption and a substantial increase in demand in oil producing countries. Therefore, the short-term oil price does not look at the prospect of sustained sharp rise. In 2020, the international crude oil is expected to be moderate and good, and the center of fluctuation will be raised, mainly considering the global monetary easing and the improvement of trade risks, so as to give some support to crude oil from the periphery. OPEC will urge all countries to reduce the implementation rate of production. Iraq and Nigeria are expected to complete the commitment of production reduction. The growth rate of us oil is slowing down, and the supply is basically in front of the situation. However, there are still logical loopholes in supply and demand. Whether the production reduction agreement can be extended after March remains to be seen. After the oil price rises to the cost line of shale oil, it also needs to be concerned about whether it will stimulate the new increment of USOC. Moreover, the global manufacturing industry has not shown stable improvement, and the growth rate of global crude oil demand is still being suppressed. These factors have formed an upward ceiling for oil prices and the upward space of crude oil 。 Based on the above analysis, the annual Brent fluctuation range in 2020 is 60-75 USD / barrel.

If crude oil fluctuates in the above range, or the driving effect on PP market is limited. From the trend chart of crude oil and polypropylene, it can be seen that the emergence of low and high points in PP market before 2018 has a great relationship with the continuous fluctuation of crude oil, but the emergence of low points in PP market in 2019 has a stronger correlation with fundamentals and a weaker linkage with crude oil. Mainly in the context of rapid capacity expansion, if the crude oil market can not continue to rise, the attention of the industry may be more inclined to the fundamentals of weak products.

PP cost support logic is not obvious for the time being

In terms of cost, after the price of polypropylene fell in 2019, the profit of production enterprises has been greatly reduced, especially the profit of PDH and naphtha cracking PP is relatively low. However, Sinopec and PetroChina are mostly integrated large projects, with long industrial chain and many products. The single product profit has little impact on their production, and the cost support logic is not obvious for the time being. However, considering that the overcapacity will be more prominent in the later stage, the production cost in 2020 deserves more attention.

In terms of imports, Iran's polypropylene trade with China is negligible. According to Zhuo Chuang, Iran's domestic polypropylene production capacity is about 1.03 million tons, with a total of 7 production lines. In the past five years, it has not completed the expansion and production increase of polypropylene, and its self-produced goods sources mostly meet domestic demand. From January to November 2019, Iran exported about 1436 tons of polypropylene goods to China, accounting for less than 0.05% of the total import of polypropylene. From the point of view of Iran alone, the proportion of polypropylene trade with China can be almost ignored, and the difficulty of Iran's source of goods has a direct impact on the supply and demand of China's polypropylene market.

The Persian Gulf Basin in the Middle East is an important energy and chemical transportation corridor in the world. The main countries along the Persian Gulf Coast are Iran, Iraq, Kuwait, Saudi Arabia, Bahrain, Qatar, the United Arab Emirates and Oman. In this part of the distribution countries, Saudi Arabia and the United Arab Emirates are the main countries with close trade relations between polypropylene and China. In 2019, exports to China are about 408000 tons and 285000 tons respectively. With the deepening of production expansion, Oman's trade scale with China will gradually expand. In 2019, exports to China will be about 36000 tons. In 2020, its polypropylene plant with production capacity of 300000 tons will still be put into production. It is expected that its trade with China will be further developed Step closer. From January to November 2019, the above-mentioned three countries exported about 729000 tons to China, mainly homopolymer injection molding, impact copolymerization and transparent materials, accounting for about 25% of the total import of primary shape polypropylene and about 3.6% of the total demand of China. If the geopolitical conflict will affect the logistics and transportation problems in the Persian Gulf, in extreme cases, it will cause a supply gap of about 3% - 4% in China's polypropylene market.

In 2020, the new production plan of overseas polypropylene is as shown in the table above, with a total capacity of about 2.355 million tons, including 380000 tons of new production capacity in countries along the Persian Gulf, accounting for about 16.1%. In terms of the impact on the expected production, the US Iraq conflict is difficult to cause a direct change in the production of new units, and most of them are expected to be put into production on time.

To sum up, if the US Iraq conflict does not occur in an extreme situation, it is expected that the impact of imports on domestic supply will be very limited. The impact on China's polypropylene market is more conducted by crude oil. However, in the context of China's rapid capacity expansion, the relationship between market supply and demand has changed, the linkage between crude oil and PP has weakened, the logic of PP cost support is not obvious for the time being, and the market focuses more on fundamentals. Therefore, from the current event progress, we believe that the key factors affecting the PP market in 2020 still need to return to the domestic supply and demand situation. In the future, we will also make tracking scores according to the event progress.