Last week (July 6-10), the domestic polypropylene (PP) market initially rose and then fluctuated at high levels. As of July 10, the price of domestic PP homopolymer had reached 8,450 yuan/ton, an increase of 475 yuan/ton or 5.96% compared to early July. In the first half of the week, renewed tensions between the US and Iran heightened geopolitical risks, driving international oil prices higher and strengthening the cost support for PP. Market sentiment improved concurrently. Furthermore, the concentrated release of downstream rigid demand and moderate restocking needs from late June helped upstream petrochemical producers maintain low inventory levels, leading to tight spot supply. Under the resonance of these multiple positive factors, domestic PP spot prices steadily climbed. Approaching the weekend, news of potential US-Iran peace talks emerged, causing international oil prices to retreat again. Market bullish sentiment cooled rapidly. Coupled with downstream factories' limited acceptance of high raw material prices and a continuous decline in their willingness to chase rallies for procurement, market transactions gradually weakened, dampening the momentum for further PP price increases. However, the low inventory situation among domestic petrochemical producers remained unchanged, and the tight spot supply effectively limited price declines, allowing PP prices to ultimately hold onto their high-level fluctuations for the week.
Key Short-Term Drivers
In the short term, the core variable for the PP market remains anchored to the US-Iran geopolitical conflict. News over the weekend of Iran potentially blocking the Strait of Hormuz again has raised expectations for higher crude oil costs, which could provide phased support for short-term PP spot prices. However, the extent of any price increase is expected to be limited, and the elasticity of geopolitical risk premium is likely to be significantly lower compared to the market reaction during the previous strait blockade incident. On one hand, the market impact of US-Iran conflict is diminishing at the margin. The current exchange of fire between the two sides is relatively restrained, with the overall direction leaning towards peace. Combined with market bets on the US ultimately easing and backing down (the so-called TACO trade logic) and the long-term oversupply structure in crude oil, this determines that the geopolitical premium in this round will be limited. Moreover, after multiple rounds of back-and-forth tensions in the Middle East, capital has already priced in the risks in advance, leading to a weakening of safe-haven-driven buying momentum.
Fundamental Headwinds Capping Gains
On the other hand, from a fundamental perspective, PP faces three major headwinds that will cap the upside of this rally.
Firstly, downstream profits are being squeezed, orders are insufficient, and the willingness to chase rallies is weak. July and August represent the seasonal consumption off-season for downstream sectors like woven bags, BOPP film, injection molding, and modified plastics. The pre-618 e-commerce festival restocking has already partially exhausted demand. End-use sectors such as home appliances, automobiles, and daily necessities are experiencing flat domestic demand and order shortages. According to monitoring data, the operating rates for woven bags, BOPP, and injection molding last week were 37%, 38%, and 40% respectively, all hovering near the lower end of the year's range. As prices rose this round, processing margins for downstream sectors turned negative again. Market transaction performance last week showed weak speculative demand for chasing rallies. Factory procurement was generally cautious, with no concentrated restocking behavior. The continuous erosion of downstream profits directly limits their willingness to increase operating rates and their enthusiasm for raw material purchases, capping the upside for this market rally from the demand side and making it difficult to form a sustained upward price driver.
Secondly, the spread between domestic and international prices has narrowed, removing export support. Recent restarts of multiple plants in Southeast Asia have improved expectations for looser supply in the region, also increasing buyer caution. Simultaneously, the strength of the recent domestic PP price rally has outpaced that in overseas markets, leading to a significant divergence in price trends between domestic and international markets. This has substantially shrunk the arbitrage window for PP exports, causing a decline in foreign trade transaction volumes. Recalling the previous significant PP rally, concentrated overseas demand and steadily increasing domestic export orders were the core drivers supporting sustained price increases. However, under the current backdrop of rapidly narrowing domestic-international price differentials, continued price increases would instead compress the export competitiveness of domestic products. The foreign trade channel cannot provide incremental demand support. Looking ahead, if international prices continue to weaken, the domestic-international price spread may widen further. There is a need to be vigilant about the potential return of low-priced overseas cargoes, which could bring incremental import pressure and exacerbate the loosening of domestic supply.
Thirdly, domestic supply expectations are loosening, with upstream operating rates having room to increase. Currently, expectations for increased PP supply are gradually materializing. Operating rates at existing plants are rising. Data shows that as of July 9, the domestic PP operating rate had risen to 67.86%, higher than in previous weeks. Multiple previously idled plants are still scheduled to restart by the end of July, suggesting further room for industry-wide operating rate increases. By production process, PDH (propane dehydrogenation) units are consistently realizing processing profits, driving a steady increase in their recent operating rates. As of July 9, the PDH operating rate had reached 73.30%, a significant increase from the low of around 50% in May. It is expected that PDH units will maintain high-level operation in the short term, continuously adding to market supply. Additionally, operating rates for units using purchased methanol or propylene have also recovered recently, further supporting supply. Currently, the only potential bullish support from the supply side is the expectation of tighter oil-based feedstock due to the Strait of Hormuz geopolitical risk. The operating rate for oil-to-chemicals (naphtha-based) units remains low, and subsequent changes in their operating rates warrant close monitoring.
Regarding new capacity commissioning, the 450 kt/year PP unit at Tarim Petrochemical has completed trial runs and produced qualified trial products. It is expected to transition to continuous stable production ramping up in August and could reach full capacity for commercial product sales in Q3. Multiple other large new units, such as the 1,000 kt/year unit at Huajin Aramco and the 450 kt/year second-phase unit at Zhongmei Yulin, are also concentrated for commissioning and start-up in Q3 and Q4. The orderly release of new capacity throughout the year makes an upward shift in the market supply center a foregone conclusion. Overall, the fundamental supply logic for the later period leans towards looser conditions, which is likely to continue suppressing the upside for PP prices.
Market Outlook
Looking ahead over the next 1-2 weeks, geopolitical conflict remains the core trading theme. The potential Iranian blockade of the strait brings expectations of higher crude oil costs, suggesting the PP market will maintain a pattern of strong, albeit volatile, trading. However, the three fundamental headwinds of weakening downstream profits, ineffective exports, and loosening supply will simultaneously constrain the rebound space, limiting the extent of any upside. Key factors to monitor later include changes in strait navigation, crude oil price fluctuations, and shifts in domestic-international price spreads. From a medium- to long-term perspective, under the expectation of continued new domestic capacity releases and higher operating rates at existing plants, the market supply-demand balance is expected to gradually loosen, suggesting a continued bearish bias for prices.
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