02 September 2009 16:10 [Source: ICIS news]
By John Richardson
SINGAPORE (ICIS news)--Global demand is yet to catch up with China’s overbuilt inventories and perhaps government intervention is needed before markets are flooded.
This is presuming it has the ability to do so in a country with vast and complex trading and distribution networks.
Strategic reserves of iron ore, copper, soybeans and crude oil were built up in the first half of the year as the government took advantage of low prices. All the easy credit also gave traders in these commodities the luxury of holding high stocks.
“Our analysis of monthly apparent demand for a few commodities including PE and iron ore suggests that apparent demand was way above trend in H1,” says a report from a leading western bank.
How can this be when approximately 40% of PE consumption in
It seems quite likely that increased trading activity took place in several polymers and chemicals during the first half.
This rather bleak view of the risks ahead runs counter to the overall optimism over the pace of economic recovery.
But to what degree is this optimism being driven by traders who are always happy to make cheery public comments if it suits their interests?
This bubble might have a lot more life in it yet, but it’s still a bubble.
How and when it’s brought to end will depend both on the traders and again the Chinese government.
This time, though, we are talking about the definite role that economic policy will play rather than flimsy theorising about maintaining commodity stockpiles.
“The Chinese government’s fiscal stimulus and accommodative monetary policy are the explanation for the performance [referring to Q2 GDP growth of 7.9%],” said the Royal Bank of
The bank talked of rapid credit growth fuelling equity and other asset-market bubbles, and added: “Key policy objectives are to spur domestic demand and to create, or at least maintain, jobs which will be expansionary only in the short term.”
Inflation has yet to rise to alarming levels – quite likely because many industries in
Fiscal tightening is unlikely to occur before the fourth quarter of this year unless evidence of damaging inflation emerges before then, concluded RBS.
Local banks have, however, already announced lending cutbacks.
China Construction, the country’s second-biggest lender, has said that it will lower second-half lending by 70%.
Numerous comments by senior politicians about the dangers of asset-price bubbles suggest more tightening could be imminent.
These statements have been a major factor behind the recent sharp decline in the Shanghai Composite Index.
But the government doesn’t want to make the same mistake twice. In late 2007 it sharply raised bank deposit rates, triggering a real-estate market collapse and the start of
To repeat, though - if the global recovery does catch up with what appear to be high inventory levels in everything from soybeans to PE, we might all get out of jail for free.
Chinese domestic consumption would have to increase by a huge amount to make up for the hole in the economy created by weaker exports.
To date the signs are not good.
“Underlying domestic demand remains weak, despite policies aimed at boosting consumer spending,” said RBS in the same report.
Global energy prices remain another threat, which have again been inflated by traders.
Markets remain in contango, despite high stock levels.
Nobody wants to cash in their chips at the moment. There’s a widespread belief that underlying demand will soon catch up with the oil, gas and refinery products in storage.
“At this point in the season we normally see a drawdown of 9.6m barrels or 4.6%.
“A build in gasoline supplies through the summer driving season has only occurred once (in 2004) in the 20 years for which the DOE has been gathering data.”
A senior manager with a global chemicals and energy logistics company added: “Go to one of
“Traders are storing oil on very large crude carriers because borrowing costs are low and because they are committed to time-charters.
“The charters were taken out when it was assumed that there would be real and immediate demand for all the crude now in storage.”
The thought of all these imbalances unravelling too quickly is enough to make anyone choke on their chilli crab (
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