Dalian Aug10.pngUndertaking fundamental analysis of a market can be a tedious business. You have to try and understand what uses the product might have, and the alternatives for the feedstocks. You might even have to look at inventory, and forecast future supply/demand levels.
Luckily, however, for the modern financial investor, these sad disciplines have been resigned to history. Instead, one merely has to look at the ‘correlations’ with designated key markets. And, of course, a helpful figure from one of the major investment banks is always on hand to provide guidance and support.
Nowhere are the benefits of modern trading more evident than in China’s Dalian future exchange, on the linear low density polyethylene (LLDPE) contract. Players there have no need to read boring stories in ICIS news about inventories being 30% – 50% above normal. Or to study purchasing manager reports that suggest demand is slowing.
No, they simply need to understand that the crude oil price is going up, along with the US S&P 500. Then, as shown in the above chart, they can pile in with their orders and take monthly volume (blue line) to an all-time record of 92 million tonnes – a mere 4 times annual global production. ‘Sentiment Rules OK’, as the graffiti used to say.
Trust the boring old blog to have to point out a potential flaw in the argument. As its friend, and Asian expert, John Richardson notes, “there is now a significant gap between (prices of) more expensive domestic material and cheaper imports“.
He also quotes a leading industry figure as warning that “It used to be that we had two markets in Asia – China and the rest of Asia, but now we have three – Dalian, China and the rest of Asia, which is causing a lot of confusion.” And this party-pooper adds that he is “really worried about the 100 KT of LLDPE that is in Dalian warehouses right now.”
This producer is clearly of the old school, who worries about such minor details as who is going to buy high-priced product when demand is slowing?‘. Luckily for the new style of investor, and the profits of the investment banks, nobody listens to such boring stuff on Dalian any more.