INSIGHT: Recession fears cloud Asia polyolefins outlook

05 July 2010 16:18  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--The mood seems to have changed since the Asia Pacific Petrochemical Industry Conference (APIC) in May, when there was talk of the worst of the economic crisis being over.

Back then - a time that now feels almost like the distant past, before the escalation of the euro debt crisis and a weakening recovery in the US - senior executives were talking confidently of a new Asian growth momentum discounting any persistent weakness in the west.

It was also thought that there was not going to be a major supply crunch in polyolefins due to constant start-up delays, meaning that these new levels of growth in Asia would greedily gobble up new volumes entering the market.

But the big proviso expressed at APIC was that everything could be derailed by macroeconomic events.

This now appears to be looming a little larger, according to polyolefin producers, traders and buyers. Eight of the 12 industry sources recently surveyed by this correspondent said a double-dip global recession is on the way; in late April, only four of the same 12 contacts thought so.

There are those who argue that this has been a disaster waiting to happen for a long while, because the global economic recovery had weak foundations.

Equally, there are others who say that we shouldn’t get carried away by recent declines in polyolefin prices, or by a highly unscientific (and small) survey by one reporter.

The price falls are partly the result of overstocking in March, when confidence among traders was so much higher.

“There was a lot of speculative booking of overseas cargoes by traders, at a time when local production was on the rise,” said one Shanghai-based trader.

“Oil prices were firm at that time and we thought that they would go higher. We were also more confident about the [Chinese] economy,” he added.

China's domestic production has averaged approximately 800,000 tonnes/month this year compared with less than 700,000 tonnes/month in 2009, according to one industry observer.

“Increased domestic production is leading to careful price management by Sinopec,” added the trader.

“Sinopec’s priority is to maximise sales from these new local plants, which means that falling yuan-based pricing is leading the market, pushing dollar-based imports in the same direction.”

China's ability to quickly stabilise production at new plants is in contrast to persistent operating issues that have limited output from the Middle East, where most of the new capacity came on stream in 2009.

Low density polyethylene (LDPE) imports reached an all-time high of 225,000 tonnes in March, according to New York-based trade data and analysis publication International Trader Inc.

Overall polyethylene (PE) imports totalled 865,000 tonnes in March compared with last year’s monthly average of 610,000 tonnes, based on figures from International Trader.

Imports have fallen steeply since their March peak, to 624,000 tonnes in April and 545,000 tonnes in May.

“This is hardly surprising, as all the bonded warehouses in China are full. Inventories are very high,” said a second polyolefins trader.

Sinopec's stock levels are reported to be at 700,000-800,000 tonnes compared with the usual 500,000 tonnes.

Interestingly, polypropylene (PP) is reported to be not as overstocked because there are less speculative traders in the polymer than in the bigger PE sector.

Imports of PP were 373,000 tonnes in March compared with an average of 350,000 tonnes/month in March 2009, according to International Trader. These fell to 318,000 tonnes in April and 292,000 tonnes in May.

PP pricing has, as a result, held up slightly better than PE as the charts show.

A further factor behind the steeper declines in PE was cutbacks by Middle East producers, an industry observer said.

This had led to greater availability of merchant ethylene delivered into a market already made longer by the surplus from Shell Chemicals' cracker in Singapore, he said.

But more fundamentally, the March bust points to the “game being over”, as the global economy weakens, said Paul Hodges, UK-based chemicals consultant with International e-Chem.

Two major global polyolefin producers hold a much more positive view of the second half of this year.

They accept that the China growth picture looks a little weaker because of government restrictions that have cooled down the property sector.

But they add that China should still see polyolefin demand-growth in excess of 10% in 2010 as a huge amount of money is still working its way through the economy thanks to economic stimulus.

This should result in reasonable demand for imports in the second half, despite an 19% increase in local polyethylene (PE) capacity in 2010, they argue.

So, as usual, take your pick from the views of the pessimists or the optimists, both of which claim to be realists.

Perhaps the outcome of the World Cup might give us a clue as to who is right.

“I was watching the recent England-Germany match with some friends and I was the only one betting on a German victory. I am also betting on a double-dip recession,” added the Shanghai-based polyolefins trader.

He also thinks Germany will go on to win the World Cup.

This means all we need to do is wait for the results of first the Germany-Spain semi-final on 8 July and then perhaps the final on 11 July.

Dead easy…

For more on PE and PP, visit ICIS chemical intelligence
Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog
To discuss issues facing the chemical industry go to ICIS connect

By: John Richardson
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