Tight PP spot supply keeps basis elevated

PP spot basis remains historically high at around 1,650 points, reflecting tight supply despite weak off-season demand. Low operating rates, delayed capacity additions, and low inventories across sectors underpin spot prices. Geopolitical tensions over the Strait of Hormuz persist, curbing new capacity. As Golden September approaches, the market leans optimistic on demand recovery, though confirmation is still needed.

Recently, with the futures market rebounding, spot prices have followed suit with an upward trend. However, the increase in spot prices has lagged behind that of futures, leading to a narrowing of the spot basis. Nevertheless, the basis remains at a historically high level. This year's high basis first emerged in March, formally took shape in April, and peaked at around 1,650 points in mid-to-late June. During this period, geopolitical factors have been volatile, with US-Iran relations alternating between escalation and détente. To date, the Middle East situation remains unstable, with both the US and Iran asserting sovereignty over the Strait of Hormuz, which has yet to be reopened.

Currently, the PP downstream sector is in the off-season for production, with weak demand. Such a high basis indirectly indicates tight spot supply.

1. PP operating rates remain low.

Although several plants resumed operations in early August, a considerable number of plants remain closed.

2. Capacity expansion pace has slowed.

In 2026, due to the impact of the Middle East situation, the pace of new PP capacity additions has been significantly affected. As of Aug, only one new unit-450kt/year PP plant of PetroChina Dushanzi PC II has started commercial production. The postponement of several other planned units has alleviated the supply pressure from new capacity.

3. Inventories remain low.

In terms of inventories, whether looking at petrochemical inventories or those of coal-chemical and private petrochemical plants, all are below year-ago levels, providing some support for spot prices.

In summary, in the short term, geopolitical factors will continue to influence the market, while low operating rates and low inventories will both support spot prices. The market is likely to remain prone to upward moves rather than declines in the near term. In about half a month, the peak season in Sep will arrive. Although there remains uncertainty about whether demand will follow through, the overall outlook leans more toward optimism.