INSIGHT: Better than expected demand drives petchems optimism

28 May 2010 17:25  [Source: ICIS news]

By John Richardson and Malini Hariharan

Greek debt crisis hangs over eurozoneSINGAPORE (ICIS news)--Petrochemical demand growth remains stellar in China, and in the US the macro-economic indicators have improved.

And even in the poor, benighted eurozone, where demand is the big problem, petrochemicals markets are tight because of production and currency issues. 

The good news, not only in China but also across the rest of emerging Asia, appears to be growth in petrochemicals consumption that is repeatedly exceeding expectations. 

“Markets are reaching a new critical mass and we are seeing much-higher multiples of growth over GDP (gross domestic product) for many of the basic plastics and chemicals than we had expected,” said a senior source with a global polyethylene (PE) producer.

But none of this will matter a jot for the medium-term prospects of the industry if the numbers that really count take hold of the real economy: The price of crude and the values of the dollar and global equity markets.

The fear gripping petrochemicals this week is that if financial market weakness persists, the world could be dragged into a new recession as the speculators once again wreak their havoc.

Tumbling crude seems to have been a big factor behind the price falls reported across a range of products as traders have off-loaded inventory. 

“We are certainly seeing a lot of panicky unwinding of PE by traders in China. For a long time they were able to hold inventories at no risk because of ample liquidity, low interest rates and stable or rising oil prices,” said a source with a second global PE player.

“Inventory levels in China were 2-3 times their normal level a few months ago and I think a lot of this resin has remained in storage somewhere in the complicated and long distribution system. Dumping of these stocks into the local market, and also some re-exports of resin from China, has contributed to the temporary gloom.”

Linear low-density PE (LLDPE) was assessed $90/tonne lower at $1,160-1,230/tonne CFR China on 21 May compared with the previous Friday. High density PE film was at $1,120-1,150/tonne CFR China - down $60/tonne.

"Buying ideas are very bad; we are waiting for concrete enquiries, said a South Korean producer on Thursday of this week. “Chinese converters are not buying as they are worried that the European crisis will result in a fall in orders for finished goods."

A further factor behind the reluctance of petrochemicals buyers to place orders is likely to be volatility in crude. This could have raised the fear of being caught on the wrong side of a price correction.

Depressed buying is not just confined to China. ICIS news reported on Thursday 28 May that even a 6% reduction in South Asia PE offer prices, along with an assurance of price protection, had not drawn the buyers in that region back into the market.

But, as we said, a lot of the news from China remains very positive.

For the first four months of this year, low-density polyethylene (LDPE) and polypropylene (PP) demand was up 10% at 1.2m and 4.4m tonnes respectively, compared with the same period last year, according to the Shanghai-based commodity information service, CBI.

Linear-low density PE grew even faster at 36% to 1.9m tonnes, while high density PE (HDPE) demand expanded by 28% to 2.6m tonnes, added CBI.

Imports of LDPE were up 35% at 638,000 tonnes, LLDPE rose by 19% to 950,000 tonnes while HDPE imports increased 9% to 1.27m tonnes.

But the bad news is that much of the demand growth seems to have been captured by increased local production, which grew by 50% for both of these polymers. 

Details of imports by country are not yet available but it seems likely that low-cost Middle East suppliers have been able to gain market share from higher-cost Asian exporters to China.

And in the case of PP, imports dropped 7% to 1.35m tonnes as commissioning of new plants pushed up local production by 20% to around 3m tonnes for January-April.

Everyone had long-realised, though, that rising Chinese and Middle East production would eventually hurt less-competitive Asian producers. Nobody should, therefore, have been unprepared for this development.  

The great news is that this is happening at a time of resilient Chinese demand-growth.

There are those who, of course, fear that the Chinese economy is a giant bubble that will eventually go pop. 

The sceptics have been predicting a steep fall in Chinese growth for the best part of a year and it hasn’t happened. 

Perhaps the reason is that local consumption has a reached a level higher and more sustainable than anyone had expected.

Even recent monetary tightening and the possible further withdrawal of government stimulus aren’t worrying some of the optimists. 

"We are at that point in time when a lot infrastructure projects funded by the stimulus package (which was announced in December 2008) will enter the construction phase, thereby boosting chemicals and plastics demand,” said the source with the second global PE producer.

Media reports also recently indicated that despite reductions in loan growth, the government is no hurry to implement further major cuts in support for the economy.

Officials were quoted as saying that a proactive fiscal policy and moderately easy monetary policy would continue to be pursued because of global economic uncertainties.

And despite the recent rise in China’s polyolefins self-sufficiency, confidence persists that delays in start-ups will continue to drip-feed new supply into the market. 

Other causes for cheer are consistent operating-rate discipline in the West and Saudi Arabian production constraints caused by reduced associated gas supply. This is the result of cuts in OPEC oil output aimed at keeping the crude price within the $70-80/bbl range.

Privately, many senior executives believe that the long-predicted new-supply flood will not happen. 

However, publicly, perhaps out of the need not to over-promise to investors, they are sticking to the “severe supply-driven down-cycle” theory. 

In these private conversations, the executives persist with the view that the biggest danger to petrochemicals is demand. The eurozone crisis getting out of control is one of the obvious demand-side side threats they have identified.

In the end, it all seems to depend, when it comes to economic prospects, on whether you view your glass as half-empty or half-full. 

But if the eurozone crisis accelerates out of control, what’s left in the glass might end up being drained away.

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