INSIGHT: Worrying times for China demand

09 September 2011 16:05  [Source: ICIS news]

By John Richardson

PERTH, Australia (ICIS)--Supply might be tight for certain petrochemicals in Asia but demand in general is not good. This raises the question about what producers can do to ensure a successful fourth quarter.

Confidence in demand is weak, which is hardly surprising given the gloomy global macro-economic news. And in China, the news gets worse.

Olefin production losses in Asia in August were the highest since at least 2007 - as the chart from the latest ICIS Worldwide Ethylene Plant Report indicates.

Asia Pacific ethylene capacity

Several scheduled turnarounds in Asia are now, however, coming to an end and some technical problems look as if they are close to being resolved. For instance, Formosa Petrochemical Corp hopes to restart its 700,000 tonne/year No1 cracker at Mailiao in Taiwan during the first half of this month.

On Friday a blast in an olefins pipeline, however, took China’s largest cracker, that operated by the SECCO venture in Shanghai, off-line along with its downstream derivatives plants.

Middle East olefin and polyolefin production has also been constrained because of technical problems with port congestion delaying polyolefin deliveries. There is, as usual, lack of clarity over when these issues can be resolved.

Monoethylene glycol (MEG) has of late been a stellar performer. Spot prices have hit a 44-month high of $1,275-1,280/tonne CFR China and are expected to soon cross $1,300/tonne, close to levels last seen in January 2008.

The price spiral was attributed to speculators who were banking on tight supply as a result of plant turnarounds in Asia and the Middle East during September and October.

Sellers were said to be in no rush to offload cargoes, while end-users were anxiously snapping-up available volumes ahead of China’s 1-7 October National Day holidays.

Purified terephthalic acid (PTA) has also risen, driven by tight supply of its feedstock paraxylene (PX).

Spot PX prices were assessed up $45/tonne on 2 September. A delay to the start-up of CNOOC-Kings Group's 840,000 tonnes/year plant at Huizhou in China and turnarounds are influencing market sentiment.

Everyone in the polyester chain is banking on strong demand during the peak textiles manufacturing season, which lasts for the next two months.

Styrene, however - as is the case with olefins - is already seeing an easing of tight supply as scheduled turnarounds come to an end. 

Polystyrene (PS) and acrylonitrile butadiene (ABS) demand is reported to be weak because of lacklustre US and eurozone demand.

This is an example of a problem affecting many petrochemicals: a weak peak demand season for making finished goods for export to the West in time for Thanksgiving and Christmas.

"The container-shipping industry is contending with the longest stretch of near-zero rates in its half-century history on the Asia-to-Europe route, as a capacity glut combines with the slowest growth in trade since 2009," wrote Bloomberg in article published late last month.

The same also applied to the Asia-US route, added the same article.

This year’s peak demand season is close to being over and so whatever support it has provided to markets is already leaking away.

Meanwhile, China has adjusted how bank-reserve requirements are calculated. The new policy involves banks being forced to include "margin deposits", or collateral deposited by customers for letters of credit and other guarantees, in calculating the share of deposits they must put aside for reserves.

"This is already making trade finance a lot harder to obtain," said a Singapore-based polyolefins trader.

Small and medium-sized enterprises were already struggling to obtain credit because of previous attempts by China to tackle inflation.

China is not only trying to rein in inflation while preventing a collapse in property prices that could destabilise its whole economy; it is also attempting to rebalance its economy towards a more sustainable pattern of growth.

A good example is the auto sector - which, of course, is a key end-use market for many chemicals and polymers.

Government policymakers are leaning towards more limits on the rise in car ownership, according to the New York Times.

This is designed to address China's steeply rising dependence on imported oil, its traffic jams, air pollution and shortages of land in many areas for more road construction.

Beijing’s policy direction has occurred despite strong industry pressure to reinstate reduced sales taxes and subsidies for rural purchases. The incentives resulted in a 33% surge in sales in 2010 over 2009. After the incentives were removed, January-July 2011 sales were up by just 5%.

Individual cities, such as Beijing, have also introduced restrictions on new vehicle registrations in order to deal with chronic traffic congestion and dreadful air quality.

The government is considering raising minimum kilometres per litre, or miles per gallon, requirements for new vehicles - and introducing new subsidies to promote the production and sales of fuel-efficient and battery-powered cars.

For the numerous foreign and auto makers who are building-up capacity in China - perhaps on the assumption that the old growth model still applies - these are worrying times. Annual auto production capacity is expected to increase to 31m vehicles by 2013 from almost 17m vehicles in 2010.

The global chemical industry has looked to China to rescue growth since the beginning of the financial crisis, but now the prospects for growth everywhere look bad.

Still, though, China remains the shining hope.

"The overriding sentiment in the European polyethylene (PE) market this week is one of uncertainty over demand in the coming weeks," said the ICIS pricing 2 September European polyolefins report.

"Few doubt that Asia will continue to soak up volumes and many players look to Asia for direction in the mid to long term."

The Singapore-located trader we have already quoted above, however, told us: "Traders are now looking to re-export Middle East material from China to Europe because they have overestimated the strength of demand in China."

Additional reporting by Judith Wang, Clive Ong, Cuckoo James, Linda Naylor and Malini Hariharan

Read John Richardson & Malini Hariharan’s Asian Chemical Connections blog
Bookmark Paul Hodges’ Chemicals & the Economy blog

By: John Richardson
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