30 November 2009 19:09 [Source: ICIS news]
By John Richardson
SINGAPORE (ICIS news)--It would be unwise to bet against ?xml:namespace>
There might be little the government can do over the next year to prevent asset price bubbles from further inflating as a result of policy decisions already taken.
Maximising revenue in yuan could remain the story throughout 2010 on continued anticipation of a currency appreciation, meaning more hot-money inflows and a further drop in savings rates.
This would have big implications for chemicals-trading volumes, which have reached very high levels in 2009.
But real and not just apparent demand growth has been nothing short of staggering during 2009.
High-density polyethylene (HDPE) demand will grow by 38% to around
This demand surge is largely the result of the government’s huge economic stimulus programme. A decline in recycling has been another factor.
Big infrastructure investments - part of the stimulus programme - are only just beginning to benefit the economy.
The economic recovery began when the government re-linked the yuan to the US dollar in June 2008, said a Singapore-based financial analyst.
“This at first led to deflationary pressures as the dollar strengthened during the height of the economic crisis.”
So the government drastically increased bank lending in order to counter this pressure.
The dollar has since weakened, dragging the yuan down with it.
This has led to a return to high levels of speculation that the local currency would eventually be strengthened in order to rebalance the economy to reduce external political pressures. China saw a similar rise in speculation in 2004-07 that led to the last big asset-price rally.
The betting now is that the yuan (CNY) will rise to around CNY4.8: $1 from the current CNY6.829: $1.
“This means that even if the government makes deep cuts in the amount of new bank lending next year - and are there are signs that some cuts will be made - net liquidity will still rise as money pours into the economy from overseas,” the financial analyst continued.
“The temptation will also be to reduce money on deposit in local banks in order to invest in higher-yielding assets. If inflation returns, creating negative deposit rates, this will add to the downward momentum on savings.”
The construction boom is therefore likely to continue, despite reports of high vacancy rates in cities such as
Growth in consumer-goods sales should also stay strong as more money flows into and around the economy.
But while chemicals demand might be strong, fathoming markets is not going to get any easier.
Traders will continue to pick up chemicals cargoes because they want the 90 days’ credit in order to speculate on other assets.
The big rise in bank lending has increased this type of speculation with non-traditional polyolefin traders entering the market, said a Shanghai-based source with the polyolefin producers.
“Sometimes they made such big profits out of, say, the stock market that they were willing to sell PE [polyethylene] and PP [polypropylene] at a loss,” he added.
This is a trend common across many chemicals and polymers, according to CBI.
Buyers have constantly been expecting much bigger volumes of new supply to hit the market than has been the case throughout 2009, further adding to the volatility on which traders thrive.
Before the long October holidays in China, for example, polyolefin prices fell $200/tonne in a few days because it had been expected that after the holidays, a lot more supply would arrive from new plants in the Middle East and China.
“It didn’t happen because of technical problems. Next year, on paper at least,
When the Dubai World credit crisis broke last week, for instance, the futures contracts fell sharply. Few buyers were, as a result, prepared to make any physical purchases on Thursday and Friday, according to CBI.
But if you can read the direction of the market enough times to stay in your job, there should be a lot of money to be made in 2010 - barring an event such as Dubai World making global economic conditions much worse.
Such is the mood of optimism that even the risk of
“The government will do whatever it takes to keep the economy growing at a minimum of 8-10% a year,” said a senior source with a global chemicals company, who is based in
“It has the financial reserves and the experience to mop up any problems. If the government had to bury unsold polymer resins, washing machines and refrigerators in landfill sites in order to reduce surpluses - that is exactly what it would do.”
And so yes, this correspondent might well have got it badly wrong by being too bearish on
The obvious thing to do now is to start believing in a collapse as this writer’s track record suggests he will be wrong again.To discuss issues facing the chemical industry go to ICIS connect
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