Oil Price Shockwave Transmission Investigation: Dongguan Plastic City once experienced a rush for goods; after the clamor subsided, the market returned to calm.

Securities Times reporter Wu Shun

“Over these past few days, it really has been a bit ‘neglecting one’s proper duties.’ I’ve spent my time every day tracking price fluctuations, and on useless back-and-forth communication with customers over bargaining. Production and business, on the contrary, haven’t been as attentive.” Speaking about recent market chaos in the downstream raw-material market triggered by a surge in crude oil prices, Xu Gaofeng, the person in charge of Shenzhen Zihua Technology Co., Ltd., said he felt helpless.

This kind of chaos is vividly on display at Zhangmutou Plastic City in Dongguan, which is known nationwide as a “barometer” of the plastics market. In early March, freight trucks coming to buy goods formed a line of several kilometers here, with shopkeepers’ phones ringing nonstop. Prices changed by the minute. Downstream manufacturers were afraid they wouldn’t be able to get supplies, sparking an unexpected frenzy of “rushing to buy plastics.”

However, Securities Times reporters found in a recent on-site visit that this wave of heat has quickly faded. Today, Plastic City has shed its bustle. Supplies in the warehouses are plentiful, but there are very few vehicles coming to pick up goods. Although plastic prices remain high, due to abundant sources there is no substantive shortage. The market has quietly fallen into a deadlock with “firm quotations but dismal trades”—a situation where goods are priced but not actually selling. A short-term surge ignited by geopolitical conflict and driven by emotions ultimately returns to rational games dominated by supply-and-demand fundamentals.

Traders check the news dozens of times a day

Oil is not only the “lifeblood” of modern industry, but also a basic input for almost all chemical products such as plastics, chemical fibers, and rubber. Since March, geopolitical tensions in the Middle East have escalated sharply. International crude oil prices have surged, directly triggering the plastics raw-material market—the core downstream track of oil.

As the end terminal procurement party for plastic raw materials, Xu Gaofeng is most sensitive to price swings: “The polyethylene I buy—around 6,200 yuan per ton at its lowest before the Spring Festival. Now the quote is basically 9,800 yuan per ton, a rise of more than 50%.” Tan Yunyi, general manager of Dongguan Haiyu Plastic Raw Materials Co., Ltd., a trader who has worked in the market for more than two decades, told reporters that the per-ton price of one of the materials he mainly sells rose from a low point last year of 7,800 yuan to around 13,000 yuan today—an increase of over 5,000 yuan per ton.

Behind the surge in prices are traders’ tightly wound nerves. When reporters interviewed them, they noticed that on the mobile screens of multiple traders, crude oil futures quotes and geopolitical news push notifications alternated flashing. “We’re watching all the time. Every round of statements from both sides of the war will directly affect prices. When prices move, downstream procurement willingness changes immediately.” A trader admitted that sometimes he has to refresh the news dozens of times a day, afraid of missing key information that would cause a misjudgment.

Warehouses full but customers few

The sharp spike in prices broke out almost in sync with the “rush-to-buy” wave. Tan Yunyi recalled that in the first few days of March, Plastic City and several major surrounding warehouses were packed to the point of being blocked. Freight trucks formed long lines. “I haven’t seen this scene in decades. Plastics have never been short.” To this day, he still finds it hard to believe.

A staff member from a leading domestic plastics supplier explained to reporters that during the Spring Festival, downstream factories take a holiday, but upstream petrochemical plants continue production. Typically, inventories build up, and after the Spring Festival, raw-material prices often move lower. Over the past year, plastic prices kept falling, so downstream manufacturers generally didn’t dare to “stock up,” leaving inventories at a low level when production resumed after the holiday. “After the Spring Festival, everyone needs to replenish materials. It just so happened that crude oil surged. Prices changed day by day, so downstream could only rush to grab a bit.”

But the “rush-to-buy” wave didn’t last. On March 24, reporters saw at Plastic City that rows and rows of shop owners were lined up neatly, but there were very few customers. At the warehouse at the entrance of Plastic City, only two or three trucks were loading. A loading worker told reporters: “You don’t need to rush anymore. There are so many goods. You load as soon as you arrive.” Tan Yunyi said that currently the market fundamentally isn’t short of plastics, and surrounding warehouses are basically full.

“Priced but no market” becomes a common predicament

At Huangjiang Huanan Plastic City in Dongguan, not far from Zhangmutou, the situation is similar. A trader told reporters that after raw-material prices surged, his overall shipment volume fell by 30% to 40%, plunging him into a typical “priced but no market” deadlock.

“The current price system isn’t healthy. It’s bad for both upstream and downstream.” The trader said that raw-material prices sometimes rise and fall by seven or eight hundred yuan in a single day. Such severe volatility prevents him from stocking up normally, and makes things even harder for downstream customers. “We don’t dare to stockpile. Right now, we can only wait until downstream customers ask for quotations, then check what the latest price is. If the customer can accept it, we place an order with the upstream.”

Xu Gaofeng’s factory currently has raw-material inventory that is only enough to sustain one week of production. “With these prices, I won’t stockpile. I can only ensure basic demand. How many orders the downstream has, I will only buy in temporarily to that extent.” He told reporters.

This kind of price environment also creates “breach of contract” risks in the industrial chain. Multiple manufacturers reported that when prices rise rapidly, some traders with relatively low credibility may cancel orders for various reasons, such as using the “force majeure” clause in the contract to refuse shipment according to previously low-price orders. “They’ll say that the Middle East conflict caused raw-material prices to surge, which counts as force majeure. Then they send the customer a photo of an empty warehouse, and the other side has no way.” A manufacturer said.

Those in the industry still have confidence in the long-term market

For downstream end manufacturers, raw-material costs account for an extremely high proportion. Xu Gaofeng said that their products, such as winding films, have plastic raw-material costs making up about 90% of total costs. “A product that used to cost 8 yuan, with raw materials taking 7 yuan. If raw-material prices rise 50%, the total cost becomes 11.5 yuan. You lose money on each order you make.” Currently, he and his peers are actively communicating with downstream customers about price increases, but they generally meet resistance. “Most customers don’t accept the price increase.”

Plastic raw materials are key inputs for many industries such as home appliances, automobiles, toys, and building materials. Price fluctuations will transmit along the industrial chain step by step. But so far, the transmission doesn’t seem smooth. A procurement person from a logistics company said that the plastic film they purchase makes up a very low share of their overall costs. They can accept price increases, but fuel costs account for a higher share. Logistics companies have already announced raising freight rates one after another.

“Many downstream manufacturers no longer dare to accept new orders. Now the reason they accept more is because they benefit from using previously accumulated raw-material inventory.” Tan Yunyi observed that among the orders still operating, most are completed using raw materials from earlier inventory. This is also one of the reasons for the “rush to buy”—some manufacturers must fulfill prior orders, so they can only replenish materials at high prices.

However, during the visits, most people in the industry still have confidence in the long-term market. They believe that the current boom-and-bust with sharp surges and collapses is more a short-term emotional shock. “We’re watching the situation in the Middle East, and there are signs of overall easing. Even if an extreme situation occurs, China’s sources of crude oil imports are highly diversified, so there won’t be a shortage of oil, and certainly not a shortage of plastics. Moreover, China’s energy mix is diversified and has strong substitutability, so these high prices won’t be sustained for long.” A downstream end manufacturer said that upstream petrochemical plants have been producing and shipping normally, and the foundation of the supply chain is solid.

(Editor: Wen Jing)

Keywords:

                                                            Oil prices