FocusAsia petrochemicals upbeat despite China interest rate hike

09 February 2011 06:37  [Source: ICIS news]

By Amanda Zhang and Pearl Bantillo

SHANGHAI (ICIS)--Asia’s petrochemical markets are expected to come to life as China re-opens for trade, notwithstanding the interest rate hike that accompanied its return after a week-long holiday, industry sources said on Wednesday.

Effective Wednesday, the People’s Bank of China – the country’s central bank – raised its one-year deposit and lending rates by 25 basis points to 3.00% and 6.06%, respectively.

The interest rate hike, which followed similar moves in October and December, did not come as a surprise to most market players since China has been grappling to rein in inflation.

“China is taking the right medicine by raising interest rates again … The central bank will continue to bring rates higher in coming months to fend off accelerating inflation risks,” said DBS Bank in a research note.

China’s inflation hit a 28-month high in November at 5.1%, before coming down slightly in December. DBS Bank said it expects inflation, as measured by the consumer price index, to stay high at the 5.0-6.0% range in the first half of the year.

Analysts said two to three more policy rate hikes were likely to be implemented this year, but players in the petrochemical markets were not too worried about the immediate negative implications on overall demand.

“Based on China’s GDP, its economic growth depends largely on external demand. Beijing raised the rates to tame inflation,” said a trader.

Industry players in the styrene butadiene rubber (SBR) market remained upbeat that China’s market come-back after a week-long absence would usher in a fresh wave of demand, which would nudge up prices.

“We expect SBR prices to continue to rise due to strong demand and tight supply,” said a China-based producer.

Offers for non-oil grade 1502 SBR had increased to $3,500-3,600/tonne (€2,555-2,628/tonne) CIF (cost, insurance & freight) China, up by $200/tonne from prior to the Lunar New Year, he said.

Industry players and analysts said the 25-basis point interest rate hike was too small to affect markets. It did not hold sway in the US equities trade Tuesday night.

“We do not expect today's rate action to significantly affect the overall market performance, as it is largely expected,” said Jun Ma, chief economist at Deutsche Bank.

“For banks, the rate hike's de facto asymmetric nature, which leads to virtually no increase in banks' net interest margin (NIM), may be a modest disappointment,” he said.

“For properties, it is also a small negative as mortgage demand will take a further hit,” Ma added.

China is now on its second year of curbing lending growth after its aggressive lending stance adopted in 2009 led to the release of a large amount of funds into its financial system, fuelling inflation.

“Slowly but surely, markets are now viewing rate hikes as positive because of their concern that central banks may be behind the curve on inflation,” DBS Bank said.

However, the resulting increase in China’s borrowing costs might make it difficult for small petrochemical players to get financing for any planned expansion, industry players said.

Additional reporting by Helen Yan and Felicia Loo

($1 = €0.73)

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By: Pearl Bantillo
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