China petchems struggle amid economic gloom

22 October 2008 07:36  [Source: ICIS news]

By Judith Wang and Dolly Wu


SHANGHAI (ICIS news)--The outlook for China’s petrochemical markets in the near future remains gloomy as most industry players have been hit hard by continuously falling prices and stagnant demand in the past few months, analysts and producers said on Wednesday.


Conditions may not improve soon as the country looks set to end five years of double-digit growth in 2008 and with slowing global demand unlikely to stem the fall in crude values any time soon, analysts said.


“Falling crude oil prices cast a shadow on chemical products,” said industry analyst Yang Wei (in mandarin) with financial services firm Guotai Junan Securities. “We have to wait for demand recover, but who knows when the demand will turn better amid such a bad economic situation?” Yang said.


Most petrochemical traders have been tracking crude’s plunge in search of the bottom of the market.


Crude prices have lost over 50% of its value since the peak of $147/bbl hit on July 11 this year, and may continue to decline as the looming scenario of a world in recession would definitely curtail demand, analysts said.


“It could be a case of the petchem bubble bursting in China as prices rose too much too fast in the first half of the year,” one melamine producer said in Mandarin.


Taking its lead from crude prices, linear low density PE film grade prices plummeted about 26% from a month ago to CNY 8,700-10,400/tonne based on pricing data from chemical information service ICIS/Chemease.


China, the world largest importer of polyethylene resin, continues to see weekly losses in its domestic markets with prices falling as much as yuan (CNY) 2,000/tonne in a week.  


Already some chemical companies are being forced to shut down plants, while others continue to cut operating rates given persisting weakness in demand and strong pressures on margins, market sources said.


“Many small companies stand on the brink of bankruptcy. I think the chemical industry will need around one year to recover to the level before the financial crisis,” a melamine producer in Tianjin said in Mandarin.


“I heard some small chemical plants in Shijiazhuang have shut down their plants. Decreasing prices squeezed their margins as they bought the feedstock prices at the time of high levels, so they can’t balance the cost and profit and they have to shut down to relieve losses,” he added.


Even demand for high-value products such as synthetic rubber has been hit, with end-users purchasing power constrained by the credit crunch.


Traders in Shandong province said local large tyre-makers operated only at 60-70% and even just at half capacity. Small units have closed down due to poor sales of tyres in light of the global financial crisis.


Prices of styrene butadiene rubber (SBR) non-oiled 1502 grade plunged 40% to yuan (CNY) 15,500-16,000/tonne in mid-October from where it was in late July. Butadiene rubber (BR) prices also nosedived by the same magnitude for the period to CNY 15,600-16,200/tonne.


Purified terephthalic acid (PTA), a key feedstock for polyester production, plunged 38% from mid-June to CNY 5,800/tonne as downstream polyester plants operated at a low sales-output ratio of only 20-40% due to weak demand from the textile industry.


“It is true, it is a tough year for export-oriented textile makers. Many small textile plants have closed in Shaoxing,” a trader in Zhejiang province said with regards to the textile production centre in eastern China.


"Export orders to the US and Europe have fallen, it is a very bad year for our company," she added, but declined to provide specifics.


The outlook remained bleak, with the majority of analysts and producers expecting a slow recovery which would be demand driven.


“At the moment, I am also totally confused for the outlook. We should pin the hope on the demand recovery and the economic rebound in the US and the Europe,” Pei Lijun, an analyst from Industrial Securities said.


Global economies have just started to feel the pinch of the financial crisis that originated in the US, with the weakness likely to prevail or even be aggravated in 2009 according to economists.


Dolly Wu, Vivien Lu, Vivian Liu and Kino Zhu contributed to this article.


To discuss issues facing the chemical industry go to ICIS connect



By: Judith Wang
+65 6780 4359

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