24 March 2009 17:40 [Source: ICIS news]
By John Richardson
LONDON (ICIS news)--The financial sector has indulged in an ?xml:namespace>
In the polyester and many other industries, money seems to be flowing to companies producing goods that might be going into inventories.
“In Shaoxing, the government has set out three ‘No’s’ for the local banks to avoid,” writes Tom Orlick, a Shanghai-based freelance journalist, in the online research publication, the China Economic Quarterly (CEQ).
These are no calling in of existing loans; no increase of collateral requirements on loans; and no imposition of additional requirements for companies wanting to take out new loans, he adds.
One beneficiary of local government support was troubled purified terephthalic acid (PTA) producer Hualian Sunshine Petrochemical, which received a reported yuan (CNY) 1.5bn ($220m) in aid.
Polyester producers are pledging to maintain operating rates of 75-80% in April and May. But just where is all their output going?
“You have visions of row after row of warehouses packed with garments, with plastic toys and with computers as
JP Morgan Chase Asset Management, in its Ins and Outs newsletter of 16 March, highlights the danger of this waiting game.
“But if such timely growth in demand does not materialise, these policies are likely to feed a traditional supply-induced deflation.
“If such a deflationary dynamic does indeed materialise its effects are likely to be exported since
This could lead to increased pressure on debtor nations as deflation would increase the burden of their foreign debt, raising the likelihood of a classic liquidity trap, the bank warns.
The continued rally in petrochemical pricing – when indications a few weeks ago were that prices would – is now starting to make sense.
If this “spare capacity” is exported by
Naphtha is unlikely to offer much support in the second half as supply of feedstock looks set to lengthen substantially. (More details will be provided in a later Insight article.)
A big reason why chemical and polymer prices rallied from mid-January onwards was the recovery in naphtha, as refiners made operating rate adjustments, argue several sources.
Modest restocking by end-users also appears to have been a factor as does, rather worryingly, speculation by traders in
The good news is that a lot of the new
Another factor behind the price rally seems to be widespread production discipline by petrochemical producers.
“To a certain degree it’s also been down to extensive refinery turnarounds in northeast
Let’s hope that all these imagined or real rows of warehouses stuffed with of everything from shirts to toys to shoes to keyboards will be emptied by strong domestic demand.
But as many as 30m migrant workers have lost their jobs due to the collapse in export trade. Some of these workers might end up re-employed on government construction projects, which make up the bulk of the stimulus package.
But will they spend their new earnings if they are worried about finding work once the construction projects are over?
Many of these workers are also likely to be earning less than $5,000 a year, as does 90% of
Incomes below this level mean that spending is concentrated on basic necessities rather than consumer luxuries, or relative luxuries such as washing machines and TVs.
As in the
The government’s pledge to spend the $123bn on such a scheme amounts to, according to one estimate, only $14.40 per person per year.
China has “room to do more” to improve health, education and social security, says the World Bank in its latest quarterly report on China.
Perhaps more announcements will follow, and, as the World Bank also points out, the huge stimulus package is already showing signs of bringing stability to the Chinese economy.
GDP (gross domestic product) growth forecasts keep being revised down, however.
Professor Nouriel Roubini, the economist, warns that the country’s GDP could grow by as a little as 5%.
Let’s be optimistic and assume the Chinese government gets to its target of 8% growth for 2009. What would this mean for the global chemicals industry?
“Over the next few years Chinese demand is likely to be almost irrelevant because it will be overwhelmed by the collapse in demand everywhere else,” writes the CEQ in another article.
“Furthermore, since prices are a function of both supply and demand and, the large increases in supply brought on in recent years to cater to Chinese demand are now weighing down prices.”
It is really hard to be an optimist these days when every piece of evidence points to a very difficult economic environment for at least the next one to two years – very probably a great deal longer.
($1 = CNY6.83)
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