Mild pressure on Asia petchems as China steps up credit squeeze

21 January 2010 07:51  [Source: ICIS news]

By Nurluqman Suratman

SINGAPORE (ICIS news)--Prices of petrochemical products in Asia may start to feel some pressure as China – a major importer in the region – appeared to have accelerated its credit tightening measures, analysts and market sources said on Thursday.

Still, demand was expected to hold up, in line with the recovery of the global economy and prevent prices from crashing, they said.

Based on media reports, Chinese banks have been ordered to stop new lending for the rest of January, as their loan portfolio ballooned in just the first few weeks of the new year.

This followed a series of interest rate hikes on the three- and one-year bills of the People’s Bank of China (PoBC), as well as an increase in the share of deposits that banks must place with the central bank.

“The last time China tightened liquidity in 2007 we saw a dip in polyethylene (PE) imports,” said Mazlan Razak, a Kuala Lumpur-based petrochemicals consultant with DeWitt & Co.

In that year, China took in 12.2% less PE compared to 2006 volumes, he said.

With the country likely importing less of the polymer because of the credit curbs, there would be more supply for the rest of Asia, which could pull prices down from current high levels, said a Mumbai-based PE trader.

“Domestic prices in China have already begun to soften after the government announced a tightening of credit,” said a Mumbai-based PE trader.

Some regional players in the polyethylene (PE) and polypropylene (PP) markets have held back purchases, anticipating prices to slide following China’s moves, he said.

Other petrochemical players expect the market impact to be short-lived.

“Traders and buyers will adopt a cautious stance and trades may slow down initially, but it will be limited as the overall demand is still very good,” said a source at a southeast Asian synthetic rubber producer.

Petrochemical product values in Asia have enjoyed a good rally since the start of the year given some recovery in demand, which is being led by China – the world’s third largest economy.

Government efforts to prevent a hard landing for China at the height of the global recession succeeded, as the economy beat expectations and grew at an annual rate of 8.7% in 2009.

But this had led to some excesses in new lending, which nearly doubled to yuan (CNY) 9,590bn ($1,400bn) – a record high, central bank data showed.

The credit boom prompted petrochemical product traders to engage in more speculative activities, which were most likely to be curtailed now that China has decided to mop up excess liquidity, market sources said.

“If liquidity is reduced in China investors will be less interested in oil and commodities,” said Victor Shum of energy consultancy Purvin and Gertz in Singapore.

“One way to look at it is that China is simply curbing inflation to prevent asset bubbles, particularly in the property sector,” he said.

The Chinese economy logged in a strong 10.7% year-on-year growth in the fourth quarter, with average inflation at 1.9%, based on official data.

If the rapid growth in lending was not restrained, this could lead to higher asset and commodity prices and cause the Chinese economy to overheat, analysts said.

Most analysts expect China, Asia’s biggest emerging economy, to return to its double-digit expansion in 2010 after a two-year lag.

“The Chinese government don’t want to see inflation. They don’t want to see a slowdown (in economy) so they are very cautious,” said Yan Kefeng, a consultant at Cambridge Energy Research Associates (CERA).

With additional reporting by Prema Viswanathan, John Richardson, Felicia Loo and Helen Yan

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

By: Nurluqman Suratman

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