FocusChina polyolefin inventories high as credit fears grow

19 February 2010 03:00  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--China's polyolefin inventories are high with an increasing risk that tighter lending conditions will impact consumption after the Chinese Lunar New Year holiday, producers and traders warned on Friday.

“A lot of the imports from early November bookings through to January arrivals have ended up in storage,” said a Singapore-based polyolefin industry source, adding to comments from a trader last week to the same effect.

“The key issue now is whether demand, when it does return, which is likely to be from the first week of March onwards, will be sufficient to consume the inventory,” added the trader.

The big export volumes seen from early November were the result of macroeconomic optimism, the trader had earlier told ICIS news.

Earlier, another senior polyolefin industry source had, however, described China’s stock levels in bonded warehouses (where imported material is stored) as low; while levels in warehouses with yuan-priced local material was said to be high, but not alarmingly so.

His comments were made in mid-January, shortly before business began to wind down for the Lunar New Year holiday.

The source with the Singapore-based polyolefin producer added: “The demand situation is more fragile than it was late last year. It’s hard to really tell exactly what the state of demand will be post-[Lunar New Year].”

“On the plus side, we should be preparing for China’s peak manufacturing season, which takes place in the summer months. But the big minus factor is increasing concern over tightening credit,” he added.

China had taken a number of measures since early January to cut back on credit supply, including increases in bank reserve requirements and a moratorium on new bank lending from mid-January through to the end of the month, said Paul Hodges, UK-based chemicals consultant with International e-Chem.

Total lending had doubled during 2009 to $1.4bn, an astonishing amount for a country with a total GDP of $4,300bn, Hodges wrote on his ICIS blog, Chemicals & The Economy.

(Please see the table below.) 

This enabled China to easily reach its target of 8% GDP growth, but it also led to higher inflation and a surge in house prices, which rose by 11%, he added.

While nationwide house-price inflation was reported to have averaged around 11% last year, property prices had risen by as much as 90% in some regions.

“The government now aims to cut lending by 22% versus 2009 to help keep inflation under control,” said Hodges.

Further tightening measures were probably inevitable, meaning that chemical companies would need to carefully reassess likely levels of Chinese demand for their products, he added.

“The problem with a credit bubble is that in order to prevent any air from escaping you have to continually pump in the same amount of air, or credit. This is obviously not going to happen this year as lending is cut back, and so this could well equal lower chemicals-demand growth,” said Hodges.

Source: The China Daily

Read Paul Hodges’ Chemicals and the Economy blog
Read John Richardson and Malini Hariharan's Asian Chemical Connections blog
To discuss issues facing the chemical industry visit ICIS connect

By: John Richardson
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