INSIGHT: China over-stocking is broad based

30 September 2009 17:38  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--No matter how you spin it - whether you are a trader who is obstinately remaining long or a senior company executive eager to increase your share value for re-financing reasons - this does not; this cannot make sense.

Low density polyethylene (LLDPE) imports into China were up by 85% in the first eight months of this year compared with the same period in 2008, according to International Trader Publications Inc (ITP), a provider of trade data and analysis on chemicals and polymers.

Benzene imports increased by 185%, polyvinyl chloride (PVC) by 138% and methanol by 431%.

These latter two statistics are the result of weaker economics of coal-based production as well as re-stocking and stronger demand.

“Year-to-date totals were up for every commodity polymer, engineering polymer and major organic we follow except expandable and non-expandable polystyrene (PS), polyacetals, polycarbonate (PC) and ethylene dichloride (EDC),” said Jean Sudol, president of ITP.

This implies high inventories in not just PE – the only polymer in which we gained clear evidence through a survey among 85 distributors and end-users carried out by a major Asian producer.

It’s easy to overcomplicate things but to put it simply, it seems impossible that this extraordinary surge in imports has gone into a sufficient increase in finished-goods sales to prevent some major dislocations.

All you have to do to reach this conclusion is look at real consumption growth (not the misleading retail sales figures) versus the decline in exports to work out that a lot of overstocking is likely to have occurred.

This would be at the chemical and polymer levels and in warehouses full of unsold washing machines and refrigerators etc.

Some of the import increases were the result of the well-documented drastic global production cutbacks, including deep refinery and petrochemical rate cuts in China, in the fourth quarter of 2008 and the first quarter of this year.

So stocks had to be rebuilt as China’s economic stimulus package kicked in, leading to country-by-country import gains which in some cases were many fold increases. South Korea, Saudi Arabia and the US did particularly well.

But this import rally continued as local production increased, according to figures we have for PE and polypropylene (PP). 

Polyethylene production rose by 6% and PP by 5% in January-May compared with the same months in 2008. Local PE output, though, fell in June this year.

Higher local output could well have been more widespread than this. The domestic industry as a whole might have been caught up in the euphoria of easy cash and the promise of a sustained recovery.

Month-on-month import volumes have started to slip.

China’s trade in August was similar to July in that imports declined for more products (15 out the 22 followed) than increased (seven out of 22),” Sudol added.

Fluctuations of this nature often occur as buyers dip in and out of markets.China PP imports to August 2009

Across-the-board price declines have, however, been reported by ICIS pricing for more than four weeks. This suggests a fundamental shift.

“Perhaps we are getting the pain out of the way early as we’ve seen a much heavier wind-down in trade ahead of the October holidays than previous years,” said a Singapore-based marketing and sales executive with a western PE producer.

“Unprecedented levels of uncertainty mean that most of the traders, who were holding high stocks, have been unwilling to stay long until after the break.”

Another factor behind the steep pre-holiday trade declines might be due to this year’s holidays being longer than usual (1-8 October).

But Sudol said: “Past history shows that the holidays haven’t generally resulted in a steep drop in volume in October (cargoes fixed earlier for delivery in that month).”

An exception was last year when October arrivals slumped because of the economic crisis.

It’s the sheer length of this import surge - combined with the step-up in local production - that catches your breath.

During the last global recession, imports spiked in December 2001-February 2002, added Sudol.

“What was different then versus now is that fewer products were involved. The spikes were nothing like the magnitude we are seeing now, and the surge only lasted one to three months. This time, it has endured for seven to eight months.” 

The length of this rally is partly the result of $1,000bn worth of new loans issued in China up until June 2009, three times the amount in the first half of last year.

This is equivalent to walking into a casino (perhaps the best description of commodity, equity and property markets in China) and being handed out free chips.

Bets that go wrong don’t always have to be paid back because of how the banking- system works.

Numerous government statements made through the state-controlled media indicate loan growth will be further slowed down and lending practices tightened up. Relatively modest fiscal stimulus in 2001-02 was followed, as we’ve said, by a 1-3 month pick-up in imports, a dip for a brief while and a strong long-term rebound due to big deficits in certain products.

This applied to PE, PP, propylene co-polymers, vinyl chloride monomer (VCM) and styrene, according to ITP.

China was moving towards self-sufficiency in methanol and PVC in 2001-02, resulting in a steady fall in imports.

Greater self-sufficiency in a broader range of petrochemicals is now expected - including PE and PP - as new capacities are brought on-stream.

This will happen from the fourth quarter this year, raising big challenges for producers whose cost-bases will exclude them from remaining import requirements.

Read John Richardson’s Asian Chemical Connections blog
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By: John Richardson
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