INSIGHT: China's polymers demand slump misery

26 September 2008 15:40  [Source: ICIS news]

By John Richardson and Malini Hariharan

SINGAPORE (ICIS news)--Polyethylene (PE) and polypropylene (PP) demand growth could be flat or even negative in China this year, warn two major producers.

Just imagine that: flat or negative growth in the world’s most important market.

“I can’t remember growth being negative or flat before. The mood is very gloomy,” said the first of these two producers.

How did things become so bad?

The causes are the global financial crisis, oil price volatility and restrictions on the sale of plastic bags in the case of PE - the worst affected of the two polymers.

One slight saving grace for PP might be that some of this year’s consumption weakness could be down to a statistical anomaly.

A consultant also cautions that the picture for PE and PP might not be as bad as the producers report because of inaccurate government data and temporary production cutbacks earlier this year that have also distorted the statistics.

But there is no denying the extent of current misery resulting from a financial crisis that threatens to further dent China’s finished-goods exports.

Says the second producer: “Small processors have already stopped production altogether with medium-sized converters cutting back on operating rates.

“Export orders (for the US) are not being placed. Although processors are now focusing on Europe this doesn’t offer much hope because its economies are also doing badly.”

A lot is made of tremendous domestic demand growth in China. For example, inflation-adjusted retail sales surged by 15.9% in August.

But the eastern and southern provinces remain heavily dependent on exports.

This will change over time as the government switches its focus to a domestic-growth model away from one based on exports and fixed-asset investments.

The process of weaning the developed regions of China off their export dependency was always going to be painful - and has been made more so by the depth of the global economic crisis.

China has enormous fiscal reserves and might well launch an economic stimulus package by the end of the year. This would compensate for the decline in export trade – but a long-term change in direction doesn’t seem likely.

For the time being, film grade high-density PE (HDPE) consumption has been battered both by the economic problems and a government ban – introduced in June – on manufacturing plastic bags less than 25 microns in thickness.

Supermarkets are reported to have also been ordered to stop giving away free plastic bags as part of China’s environmental drive.

PP looks to be in freefall. The first producer reports declines in demand of more than 20% in June-September over the same period last year.

Such a steep drop during these months is particularly significant: this is normally the peak season for manufacturing finished goods for export to the West in time for Christmas.

But at least some of the PP consumption reductions seen in the first half of this year could be down to unusually high imports during the first half of 2007.

A lot of cargoes were booked from North American to Asia in the fourth quarter of 2006 but didn’t arrive until early the next year, said the first producer.

Sellers had to run down inventory built up in anticipation of a repeat of the Hurricane Katrina disaster in 2005. Fortunately, there was no repeat and the US petrochemical industry escaped production losses.

“Although PP consumption looks bad on paper, up until June our sales were very good in China. We could have sold out several times over,” he added.

But he admitted that the reason for these strong sales might have been due more to oil prices rather than healthy fundamentals.

Crude prices were on an historic bull run, eventually reaching an all-time high of $147.27/bbl on 11 July.

Polyolefin buying behaviour is heavily influenced by crude as higher oil can translate into increases in resin prices within days.

Converters stock up if they believe oil will continue to rise and reduce inventories when they are sure crude is in bear territory.

But despite oil showing strong gains since late last week - with all-time record gain of 16% on Monday - there are no signs of polyolefin buyers pouring back into the market.

The China polyolefins market had seen the steepest week-on-week price fall in a decade, as some Asian and Middle East producers, succumbing to mounting inventory pressure, slashed prices by more than $150/tonne, traders and producers said on Friday.

Asian HDPE film grade for October shipment was being offered at $1,450/tonne CFR China earlier this week. This was $100/tonne lower than discussions the previous week, according to global chemical market intelligence service ICIS pricing.

October PP injection and yarn grade was being offered at $1,300-1,370/tonne CFR China at the same time. This again represented a big decline - $100-150/tonne on week-earlier negotiations.

PE and PP markets have been incredibly quiet because of all the uncertainty over the financial crisis and the direction of crude.

These lower offers probably reflect deep pessimism over the short-term outlook for the global economy - and perhaps even weaker export orders since doubts arose over the implementation of the US financial rescue package.

Early on Friday, though, it seemed as if a deal would be reached.

The recovery in crude has, however, reawakened fears over inflation - the big threat to the strong growth in domestic demand in China and other emerging market economies.

There is hardly much point on stocking up on resin in anticipation of higher crude if inflation ends up eating into retail sales.

But a Beijing-based consultant struck a more optimistic note. He said: “I think polyolefin demand for the full year will be positive in China.

“Demand numbers based on government statistics are not accurate. We recently looked at PP data, for example, and found that at least 20 small plants attached to refineries were not included.

“Two months ago we also saw cutbacks in petrochemical production because of fuel shortages. Sinopec and PetroChina were ordered to increase gasoline production at the expense of supplying naphtha for steam cracking.”

Government statistics might have also become more unreliable as production numbers are now only provided for each province. Previously, they were available for every producer.

Sadly, though, as Scott Anderson said last week on the overall financial situation: “I’d like to say that the worst is past us, but it’s impossible to put lipstick on this pig.”

Anderson, chief economist at the US-headquartered financial services company, Wells Fargo, was speaking at the Chemical Purchasing Summit in Boston, Massachusetts.

South Korean PP exports to China fell by 42.17% in August over the same month last year with low-density PE (LDPE) shipments declining by 33.2%.

The beast waiting around the corner, ready to maul less-efficient producers, is the big wave of Middle East and Indian new capacity.

Rumours persist of significant further delays in the Middle East with the ramp-up in PP output in 2008 far less than had been expected.

But the capacity will come, with the damage potentially catastrophic for the weaker producers – especially if economic conditions become even worse.

And even if a rescue package is agreed by Congress will it work?

The days of “binge” lending that supported chemicals consumption in the West and in emerging markets might have also come to a permanent end with the restructuring of the banking system.

Volatility in oil prices - because of tight long-term supply and demand balances - could also be here to stay, making the life of any sales or purchasing manager very difficult.

We are into new territory. Navigating this territory will require a whole different set of skills - from sales and purchasing to sourcing and managing finance.

This expertise will be very different from what was required when the economic “super-cycle” was in full swing.

Keep up with key Asia markets: read John Richardon's and Malini Hariharan's blogs

To discuss issues facing the chemical industry go to ICIS connect

By: John Richardson
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