30 December 2009 00:00 [Source: ICB]
China and India are coming off a strong year, but a repeat in 2010 is less likely. Inflation could derail Asia's giant economic engines
By John Richardson/Singapore and Malini Hariharan/Mumbai
Rex Features/Chris Eyles
But will it last? Inflation looms as a major challenge in 2010, both for China and India.
Surging property prices could be the biggest inflationary threat to China in 2010 - one that the government needs to address without causing a double-dip recession. Plus, the rising cost of food on poor harvests and higher energy prices are a threat to both of Asia's economic juggernauts.
China might see lower growth during the second half of this year - a result of fiscal tightening necessary to keep inflation in check. This is likely to occur as China seeks to stabilize production at large, new integrated refinery-petrochemical complexes, which will, sooner or later, result in a big fall in import requirements.
If you take strong import growth out of the 2010 picture, how will overseas producers respond if the Western economic recovery remains anemic? Will they be able to deliver financial performances to justify the recent rapid improvements in the value of their shares?
CHINA'S YEAR TO REMEMBER
A combination of deep refinery-petrochemicals production cuts in China in the fourth quarter of 2008, start-up delays, mainly in the Middle East, China's massive economic stimulus package and a big rise in domestic bank lending have led to greater import volumes.
The country's polyolefin demand is likely to rise by 20-35% in 2009 compared with 2008 on a dip in recycling, restocking, strong domestic demand and speculation, estimates a leading exporter to China.
And a Shanghai-based source at an Asian polyolefin producer says: "These are amazing numbers, but I don't expect a repeat in 2010 because of exceptional factors such as restocking and the amount of credit available for speculation. Growth in 2010 should be much more in line with GDP." China's economy is expected to grow by 8-10% in 2010.
WHAT LIES AHEAD
China's state-controlled banks have already introduced tougher lending regulations to reduce speculation in everything from commodity chemicals to equities and real estate.
A wide range of commodity chemicals have been bought this year just for the sake of getting hold of credit, according to Shanghai-based commodity information service CBI China.
Chemical cargoes have, in some cases, even been sold at a loss after the credit has been used to make money on, say, equities, adds CBI. For this reason, an imported cargo of ethylene dichloride (EDC) was sold at below raw-material costs.
A big driver of strong domestic chemical demand - and the overall economy - is the property sector.
This is the main reason why private investment grew by 45% in the year to September, compared with 33% growth in spending by state-owned enterprises, according to online Beijing-based research publication China Economic Quarterly (CEQ).
But rising property prices are raising worries about inflation. The central government faces the tricky task of maintaining the construction boom while preventing real-estate costs from rising so much that inflation gets out of hand and properties become unaffordable for average earners, the CEQ adds.
A healthy construction sector is vital to the health of the overall economy, the publication says, using the example of "cash-strapped municipal governments." In 2008, 34% of local government revenue came from land sales and land taxes, it estimates.
Inflationary pressures will build to the point where some fiscal tightening will be needed by mid-2010 at the same time as a revaluation of the yuan, predicts the CEQ.
A lot of the hot money flowing into and around China's economy is the result of speculation that the local currency will be allowed to strengthen. The priority right now is to maximize yuan-based revenue, ahead of an increase in its value against the US dollar.
"This is a major incentive to trade in big volumes of chemicals and other commodities," says the Shanghai-based source at the polyolefins producer.
Lower growth in the second half of 2010 - a result of monetary measures - might coincide with a steep rise in China's self-sufficiency in some petrochemicals and polymers.
Sticking to polyolefins as an example, China is due to increase its high density polyethylene (HDPE) capacity by 45% and its linear low density PE (LLDPE) capacity by 35% in 2010, adds CBI.
But after a 2009 in which almost every month saw buyers dipping out of markets in anticipation of big supply increases that didn't happen, further start-up delays and problems with stabilizing production at plants already running seem very likely.
INDIA BEATS EXPECTATIONS
After beating expectations to post GDP growth of 7.9% in the third quarter, the Indian government is increasingly confident that the country will see growth of at least 7% in the fiscal year ending March 2010, making it one of the fastest growing economies after China.
Economic experts are also positive on future prospects, although their estimates are lower in the 6-6.5% range for the fiscal year ending March 2010 and 7-7.5% for the fiscal year ending March 2011.
India's swift recovery in 2009 was primarily driven by government spending, a steady expansion in manufacturing and increased private spending.
This helped support demand for petrochemicals. For instance, PE, polypropylene (PP) and polyvinyl chloride (PVC) consumption expanded by 20-30% during the year, supported by the packaging, automotive and infrastructure sectors.
A strong focus on the local market helped Indian companies boost sales at a time when companies in the West struggled with weak domestic demand.
While expectations are running high that India will quickly return to the 9% plus GDP growth path, economic experts caution that the country still faces a bumpy ride.
One of the biggest concerns, as always, is the large fiscal deficit that increased in 2009 from the government's economic stimulus package. The fiscal deficit is currently running at around 6% of GDP but, could widen to 7% by March 2010.
The government also needs to urgently tackle inflation, especially food-price inflation, which was estimated at over 17% at the end of November 2009. Poor rainfall across the country has affected food-grain production and fueled inflation, which could rise further as the full impact of reduced agricultural output has yet to be digested.
Questions also remain on what will happen when the government withdraws its stimulus package and moves to a tighter monetary policy regime in 2010.
Despite these concerns, the chemical industry remains confident about long-term prospects.
"The auto sector has shown phenomenal growth this year and this trend is likely to continue," says a source from a leading chemical company in India.
Passenger vehicle sales are projected to rise from 1.8m in 2008 to 3m by 2013, while the market for electrical appliances is expected to double to $10bn by 2015.
Much needed infrastructure spending is also due to take place, with the government proposing to spend up to 9% of GDP by 2014 on building roads, bridges, ports and power plants, up from the current 6%.
India may not be delinked from the global economy, but there is optimism that the economy's domestic focus will help the industry weather any crisis.
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