China’s surprise interest rate hike weakens select petchems

20 October 2010 07:35  [Source: ICIS news]

By Fanny Zhang

China raises interest rate late on TuesdayGUANGZHOU (ICIS)--China’s surprise overnight interest rate hike raised concerns that consumption in the world's third biggest economy will weaken, sending prices of selected petrochemical products lower on Wednesday.

The People’s Bank of China (PBoC) announced late on Tuesday that it would raise its one-year lending rate by 25 basis points to 5.56% effective 20 October, after keeping interest rates steady for nearly three years.

Commodity prices immediately reacted Tuesday night, with crude shedding more than $3/bbl overnight or 4.32% to below $80/bbl, the biggest decline it had in eight months.

At noon, NYMEX crude was slightly up at $80.10/bbl (€58.47/tonne).

Trades in most petrochemical products were conspicuously slow on Wednesday as market players digested China’s direct monetary tightening that caught them by surprise.

“It is only a 25 basis points increase in interest rate, and the market is over-reacting with crude and natural rubber futures falling,” said a Chinese styrene butadiene rubber (SBR) producer.

SBR prices in the Shanghai Futures Exchange declined by more than yuan (CNY) 1,000/tonne ($150/tonne) to around CNY 31,000/tonne on Wednesday.

At the Dalian Commodity Exchange (DCE), meanwhile, linear low density polyethylene (LLDPE) futures for November delivery declined by CNY185/tonne on Wednesday morning to CNY10,870/tonne.

“We lowered down offers for polyethylene and polypropylene in the morning but so far no deals were done,” said a sales manager at Chinese chemical trader Sinochem International.

“This is a usual reaction as capitals are tightening, buyers are prudent and would not like to act at this sensitive moment,” the trader said.

Some market players, however, said that these were just knee-jerk reactions that may soon wane.

Crude’s decline due to China’s policy moves was cheered by Chinese (methyl tertiary butyl ether (MTBE) market players, traders said.

“They (Chinese MTBE buyers) couldn’t afford it when crude was above $83/bbl. But they have the appetite to import more MTBE,” one trader said.

Demand for the octane booster was strong due to a shortage of high octane gasoline, as most refineries in China produce lower octane petrol, traders said.

“They have the demand. So they have been waiting for this day for a long time,” said a trader, referring to weaker crude futures.

Further downstream, caprolactam traders retreated to the sidelines upon news of the interest rate hike.

“The market went all quiet today, and would likely to remain so for the rest of the week,” a trader said.

Rising inflation and concerns about possible overheating of the Chinese economy had prompted the sudden hike in interest rates, analysts said.

“Keep in mind, the growth momentum in China is still pretty strong. I think that it is a sign of risk, it could be a bigger problem,” said Thomas Lam, chief economist at brokerage OSK Group/DMG & Partners.

China had flushed huge amount of cash into its financial system last year in a bid to prevent a sharp slowdown in its economic expansion.

Containing the risk of the excess funds creating asset bubbles and fuelling continued spikes in consumer prices requires a direct action from the central bank, analysts said.

Higher interest rates, however, have a dampening effect on growth.

“This rate hike is a confirmation that a policy consensus is reached to tolerate lower growth as it is taking place at a time when GDP growth is obviously decelerating,” said Jun Ma, Hong Kong-based chief economist at Deutsche Bank.

Ma said he expects China’s economic expansion to decelerate to 8.0-8.5% in the fourth quarter from nearly 12% in the first quarter.

($1 = €0.73 / $1 = CNY6.65)

With additional reporting by Felicia Loo, Dolly Wu and James Dennis, Helen Yan, Pearl Bantillo and Junie Lin

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

By: Fanny Zhang
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