01 February 2010 16:21 [Source: ICIS news]
By John Richardson
SINGAPORE (ICIS news)--An increase in speculative trading appears to have been accompanied by a rise in storage space for liquid chemicals in China, creating the potential for a sudden price collapse reminiscent of the one which caused the global economic crisis.
In the case of methanol, for instance, a methanol industry source describes how some individual ports down China’s eastern coast have the capacity to store as much as 1m tonnes - equivalent to one world-scale plant.
“We call it the ‘methanol bomb’. Right now markets are very tight, but this won’t always be the case. Production and logistics issues have made methanol tight,” he said.
A lot of the storage in methanol seems to have been added to provide physical support for several methanol futures exchanges that have sprung up in ?xml:namespace>
Genuine consumption into finished goods has also boomed, (which applies across the chemical industry), justifying some of the investments in tank-storage.
But what the industry sources say is an “oversupply in futures markets” is linked to excess storage capacity.
The nightmare scenario of an inventory-driven collapse is easy to portray but obviously much harder to predict in terms of probability and timing: A major macro-economic event, or series of events, that precipitates a collapse in commodity prices in general, leading to a panicky unwinding of high methanol stocks.
It was exactly this kind of unwinding that caused the economic crisis. Financial institutions flooded markets with financial derivatives after the collapse of Lehman Brothers in an effort to minimise losses, resulting in the opposite effect - a downward spiral of collapsing prices as sellers hugely outnumbered buyers.
“In chemicals you could envisage this happening at a time of high inventories if, say, the US suddenly upped protectionist measures against
Or it could be that the Chinese government gets it badly wrong again - as it did in late 2007 - and takes economic cool-down measures which turn the temperature up to deep-freeze.
The betting on interest rate rises among economic pundits has shifted in just a few weeks from “not before the second half of this year” to “as early as February”, as inflation has increased.
It was badly proportioned and timed rate rises (occurring as the
In aromatics, also, it seems as if a great amount of storage capacity has been built, the total quantities of which are hard to track.
“As you go further inland on the major rivers, such as the
“The same applies to methanol - there’s a lot of cheap storage upriver,” added the methanol industry source.
In the case of polymers, it’s always been impossible to accurately estimate total inventory space. This could stretch from warehouses to factory forecourts, living rooms, garages and back gardens.
But there have been credible reports of higher-than-normal stock levels down long and complex polymer distribution and storage chains in
The easy credit conditions we’ve seen over the last year, and into the few weeks of 2010, have clearly driven up speculation in all kinds of chemicals and polymers.
This would logically have to be accompanied by increased storage in order to raise the stakes on both physical and futures markets, with plentiful lending making it a synch to borrow to build tanks, warehouses etc.
But the Chinese government is reining back credit following the massive lending splurge seen during the first two weeks of this year, causing the volume on the Dalian Commodity Exchange’s LLDPE futures contract to dip.
And with many chemicals and polymers markets seemingly tight at the moment, the potential for a cataclysmic stock-driven price collapse appears to be very low over the next few months.
Separately, though (this is another story altogether), this correspondent hasn’t talked to anybody with a clear handle on levels of finished-goods inventories in
Manufacturing levels were high in 2009, creating the possibility of high unsold stocks of everything from washing machines to fridges to plastic toys, many chemicals industry sources have said.
“Fridges that couldn’t be sold domestically have been put on a ship and have flooded international markets, driving prices down,” a Singapore-based polyolefin industry source said late last year.
High manufacturing output looks as if it was driven by loose credit - by some unknown degree.
Easy lending has reportedly been channelled to heavily-export dependent sectors such as textiles. This enabled factories to run hard in order to minimise job losses.
It must be stressed, though, that domestic demand-growth numbers for manufactured goods including autos, fridges and washing machines were staggeringly good in 2009.
Might macro-economic crises of the types described above still, however, cause invisible stocks of finished goods to suddenly unwind, resulting in sharp chemical and polymer price declines?
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