INSIGHT: China demand, new supplies cloud 2010 Asia outlook

30 December 2009 14:46  [Source: ICIS news]

By Malini Hariharan

MUMBAI (ICIS news)--Optimism is a scarce commodity in the Asian petrochemicals industry these days.

Even as market players celebrate the finish of what has been an unexpectedly good year there are not many who expect a repeat performance.

A key concern is Chinese demand which saved the industry in 2009. A massive government stimulus package boosted domestic consumption and imports of a wide range of petrochemicals. 

“The impact was quite dramatic. If you look at growth numbers, it is around 35% for polyethylene [PE] and over 20% for polypropylene [PP]. That’s huge; I can’t remember ever seeing such numbers. But is that sustainable? My answer is no,” says Mazlan Razak of Dewitt & Co.

A South Korean polyethylene (PE) exporter agrees: “We expect Chinese demand to be good in the first quarter. But what will happen in the second quarter will depend on whether government stimulus will continue. Margins were good in 2009, but they will probably be squeezed next year.”

David Jiang of Beijing-based Sinodata Consulting says the Chinese government can’t continue investing for growth.

China faces an overinvestment problem in the coming years. Many industries face oversupply. Chemical companies are building plants for polyvinyl chloride (PVC), methanol or dimethyl ether (DME) despite low operating rates. The average industry operating for methanol and DME in H1 2009 was only 30-40%,” he points out.

These investments are mostly made on government funding and few promoters care if the projects will make money. “It is a government gift,” he adds.

“If you look at the Chinese economy, the state-owned enterprises are doing well. But a lot of people in the private sector are losing interest in manufacturing. They are speculating in the stock market or in the real estate market,” says Jiang.

And while the Chinese government has indicated that some of the subsidies introduced in 2009 to boost sales of automobiles and electrical appliances will continue, Jiang is skeptical on whether this will have the same impact.

“A lot of people have already bought cars and air conditioners. Gasoline prices are getting higher; the cost of using a car is increasing. And incomes are not increasing.  There is still some potential, but I don’t see the same growth,” he adds.

Any deceleration in Chinese demand next year would coincide with the completion of more new projects in the country and elsewhere in the region. New capacities commissioned in 2009 are also expected to stabilize operations next year.

“We may be entering a period when supply would be easing.  Will demand growth offset that? I kind of doubt it,” says Mazlan.

But there are also reasons to not be too pessimistic about 2010.

Firstly, the global economic outlook looks better next year. This means that on the demand side, things will pick up in the rest of the world, points out Mazlan.

And though the Chinese government is likely to go easy on its stimulus program, it is unlikely to allow the economy to slow down.

A rise in the yuan dollar exchange rate could draw money from overseas and keep the asset bubbles from bursting.

A stronger yuan would make imports attractive and support overseas players in the Chinese market, says the Korean exporter.

The impact of maintenance shutdowns should also be factored in calculations for 2010. For instance, the Asian olefins market faces a heavy cracker turnaround schedule next year.

“If you look at the schedule, supply will be fairly tight in Q2-Q3. At the same time new plants would need ethylene/propylene to start derivative plants ahead of the crackers. So there will be demand. I think it is going to be a difficult situation next year and I do not expect all new capacities to operate at 100% immediately after start up,” says Mazlan.

The last couple of years have also shown that new plants rarely meet their start-up schedules and companies often face difficulties in stabilizing operations.

The months ahead could well throw up some pleasant surprises but it would probably be safe to prepare for tougher market conditions in 2010.

Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog
To discuss issues facing the chemical industry go to ICIS connect

By: Malini Hariharan
+65 6780 4359

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