Rising Raw Material Prices Squeeze Agricultural Film Profit Margins, While Off-Season Demand Continues to Run at Low Levels

[Introduction] Recently, influenced by the rebound in international oil prices and the rise in geopolitical risks, the prices of polyethylene raw materials have risen. However, agricultural film is in the traditional off-season for production, and prices are running relatively stable, resulting in a significant compression of profits for agricultural film. At the same time, there is limited follow-up on orders from enterprises, and raw material inventory remains basically stable. Looking ahead, polyethylene prices are expected to fluctuate and rise, while the operating rate of agricultural film and raw material demand will remain at low levels. In the short term, agricultural film prices may make slight adjustments following raw material prices.

Recently, international oil prices have risen again amid escalating geopolitical risks. The United States stated that the ceasefire agreement has come to an end, and concerns over a possible renewed blockade of the Strait of Hormuz have intensified. Uncertainty on the supply side has pushed up crude oil prices, thereby providing cost support for the polyethylene market. The LDPE film price rose to RMB 9,414/ton, up RMB 459/ton from last week, while the LLDPE film price reached RMB 7,609/ton, up RMB 200/ton from last week. However, although raw material prices have increased, film prices did not decline in line with the earlier drop in feedstock prices due to the lag in price adjustments for agricultural films. In addition, the market is currently in the off-season for agricultural film production, so overall fluctuations have been limited. As a result, agricultural film prices basically remained stable this period, with mainstream prices for double anti-fog film in North China holding at RMB 8,900-9,800/ton. Nevertheless, the combination of higher raw material costs and relatively stable agricultural film prices has narrowed the spread between agricultural film products and raw materials, thereby squeezing theoretical profits. The average profit of greenhouse film this period decreased by RMB 73.0/ton compared with the previous period.

From the perspective of raw material inventories at sampled agricultural film enterprises, the number of days of raw material inventory remained basically unchanged from the previous period, though the structure showed slight divergence. On the one hand, with recent raw material prices showing mixed movements, some greenhouse film enterprises saw follow-up in sporadic orders, which increased their demand for raw material procurement and led to a slight rise in raw material inventory days. On the other hand, mulch film remains in the off-season for demand, with limited accumulation of new orders, resulting in low consumption of raw materials and weak restocking demand; accordingly, raw material inventories at mulch film enterprises declined slightly during the period. Overall, the number of days of raw material inventory at sampled agricultural film enterprises remained in line with the previous period.

Looking ahead to the next period, polyethylene prices are expected to fluctuate upward, with a potential increase of RMB 150-400/ton, mainly supported by stronger cost factors and macro sentiment, though supply-demand fundamentals have weakened somewhat compared with the previous period. In terms of agricultural film, during the traditional off-season, orders are only being placed sporadically, operating rates at enterprises remain low, and the pace of raw material consumption shows no significant change. Continued fluctuations in polyethylene prices have led agricultural film producers to maintain a just-in-time purchasing approach, with no clear expectation of notable changes for now. Therefore, the overall raw material inventory days of sampled agricultural film enterprises are expected to remain subject to slight fluctuations. At present, agricultural film is in the traditional window period when mulch film production is in the off-season and autumn greenhouse film restocking has not yet started on a concentrated basis. New orders at enterprises are limited, and most companies are still adopting a production model of accumulating a certain volume of orders before arranging centralized production. Overall operating rates are expected to remain at low levels with narrow fluctuations. Demand for raw materials is relatively limited, enterprises generally hold a wait-and-see attitude, and there are no obvious signs of fluctuation in raw material inventories. Meanwhile, mixed movements in raw material prices will be directly transmitted to agricultural film production costs. Therefore, in the short term, agricultural film product prices may adjust in line with fluctuations in raw material prices. Mainstream quotations for double-resistant film in North China are expected to remain at RMB 8,900-9,800/ton.