The domestic propylene oxide (PO) market shifted from weakness to strength this week, supported by rising production costs and limited growth in supply.

As of September 3, prices in Shandong had increased by 8.02% from the beginning of the week, bringing the market back above the RMB 10,000/ton level.

In the short term, strong cost support is expected to remain an important driver of the market. However, after prices return to relatively high levels, market attention is likely to gradually shift toward supply and demand fundamentals. With additional supply expected to enter the market from mid-September, subsequent price movements may increasingly be determined by the balance between supply and downstream demand.

Limited Supply Growth Keeps the Market Relatively Tight

On the supply side, domestic propylene oxide production has recently experienced fluctuations, with daily output first declining and then gradually recovering.

Last week, the Shida unit was shut down for tower cleaning, while Binhua and Sanyue also experienced short-term fluctuations and reduced production toward the weekend. Meanwhile, the Lianhong and Wanhua units had not yet resumed operations, keeping daily PO output at around 15,000–16,000 tons.

This week, chlorohydrin-process producers have generally returned to normal operations, while Wanhua and Lianhong have gradually resumed production. As a result, daily output has increased to approximately 17,500 tons, with capacity utilization rising by 7.21 percentage points.

However, the actual increase in market supply has been slower than expected. Although production increased, the increase in available spot supply was only around 800 tons, less than half of the theoretical increase in output.

Therefore, the market has not yet experienced significant supply pressure. During the initial stage of plant restarts, the additional supply is being absorbed relatively smoothly, leaving the market in a tight but balanced state.

The relatively tight spot supply is also an important factor supporting the recent price increase. This is particularly evident in the southern market, where spot availability remains limited and prices continue to command a premium.

Looking ahead, Qixiang Tengda's 300,000-ton HPPO unit and Satellite Petrochemical's 400,000-ton HPPO unit may restart around mid-September, although the exact timing remains uncertain.

Significant additional supply is therefore unlikely to enter the market this week or next week. In the short term, Lianhong's potential restart of its downstream polyether unit may also influence its production schedule, with small-scale supply increases likely to be the main feature of the near-term market.

Demand: Low Inventories Support Buying, but High Prices Limit Follow-Up

On the demand side, market sentiment was relatively weak toward the end of last week.

At that time, market participants were closely watching the expected restart of Lianhong and generally anticipated that the market could weaken temporarily after the release of month-end purchasing demand. As a result, many buyers adopted a cautious wait-and-see approach and reduced their purchasing activity.

This week, however, the slower-than-expected supply recovery, combined with strong cost support and expectations of a rebound in PO prices, encouraged downstream buyers to continue purchasing.

New orders increased at the beginning of the week, but some market participants reported weaker purchasing momentum in the middle of the week, with relatively limited follow-up from end-users.

Looking ahead, once PO prices remain above RMB 10,000/ton, downstream buyers are likely to become increasingly cautious.

Rather than actively chasing higher prices, buyers may slow their purchasing pace and wait to see whether the price increase can be successfully transmitted downstream. If end-users find current prices difficult to accept, weaker demand could eventually put pressure on the upstream market and limit further price increases.

Costs: Rising Propylene Prices Provide Strong Support

Cost pressure remains one of the most important drivers behind the current PO price rebound.

Propylene, the main raw material for propylene oxide, has recently received support from both supply conditions and fluctuations in crude oil prices, resulting in a significant price increase.

As of September 2, the mainstream propylene price in Shandong had reached RMB 9,525/ton, up RMB 795/ton from RMB 8,730/ton on August 26.

As propylene prices climbed, the propylene–PO price spread narrowed further to around RMB 275/ton.

The sharp rise in propylene prices has therefore become a key factor behind the latest round of PO price increases. At the same time, production profitability has continued to deteriorate.

As of September 2, the theoretical profit of the chlorohydrin process was approximately -RMB 1,138.75/ton, down 21% compared with August 26. This indicates that while PO prices have increased, the rise in propylene costs has placed considerable pressure on producer margins.

In the short term, sharp fluctuations in crude oil prices may continue to influence the propylene market. Although propylene prices remain relatively strong, the premium available in actual transactions has weakened.

Therefore, subsequent movements in crude oil and propylene prices will remain important variables for the PO market. At the same time, attention should be paid to whether the expected increase in supply can actually materialize under the current high-cost environment.

Market Outlook: Cost Support in the Short Term, Supply and Demand in the Longer Term

In the short term, propylene oxide prices have returned to relatively high levels above RMB 10,000/ton. Strong raw material costs, combined with limited supply growth, should continue to provide support to the market.

However, demand-side resistance is becoming increasingly visible as prices rise. Downstream buyers may become more cautious, while weaker end-user acceptance could limit further price increases.

Before mid-September, the increase in domestic PO supply is expected to remain relatively limited, meaning that cost fluctuations are likely to have a more pronounced impact on prices.

After mid-September, market attention will gradually shift toward the timing and scale of new supply releases, as well as the actual performance of downstream demand during the traditional peak season.

If major units restart as expected and supply increases significantly while demand fails to keep pace, the market could gradually shift from a cost-driven upward trend toward supply-and-demand-driven consolidation.

Overall, the propylene oxide market is likely to remain relatively firm in the short term, but the possibility of narrow-range adjustment and consolidation in the second half of September should not be ruled out. The key variables will be raw material costs, the pace of plant restarts, and the strength of downstream demand.