INSIGHT: Polymer players hope for China holiday stability

02 October 2011 15:00  [Source: ICIS news]

By John Richardson

PERTH, Australia (ICIS)--The statistics speak for themselves. For example:

• The full HSBC August manufacturing index for China, which was released on Friday, showed that manufacturing input costs were rising at their fastest rate for four months, suggesting that the battle against inflation is a long way from being won. Although the final HSBC purchasing manager’s index was revised up to 49.9 from an initial reading of 49.4 earlier in September, the index registered its lowest quarterly average since early 2009.
• The price of land in Beijing fell by 76% in August from a month earlier, while in the province of Guangzhou it was down by 53%, according to Soufun – China’s biggest real-estate website.
• Land auction failures surged by 242% in the first seven months of this year because of government curbs on the property market, and prices of new homes declined in 16 out of 70 cities in August compared with July, according to government data.
• Real-estate developers that have lost access to finance because of China’s credit clampdown are reportedly being forced to sell, creating a downward spiral in prices.
• China’s vehicle sales grew by only 3.3% in the first eight months of this year, according to the China Association of Automobile Manufacturers. For the full-year 2010, sales grew by around 30%.
• Some economists are talking of second-half 2011 and first-half 2012 GDP growth in China in the low single digits, possibly even as low as 5%.

A slowdown was perhaps inevitable following two years of stimulus-fuelled growth.

But the scale of the slowdown in some chemicals markets – as the central government continues to rein back liquidity in an effort to deal with inflation – is taking a lot of people by surprise.

“I just hope that the week-long national holidays [1–7 October] will bring some stability to the market and give people time to reflect,” said a Shanghai-based marketing manager with a major Asian polyolefins producer.

Polypropylene (PP) prices fell by a further $40–50/tonne (€30–38/tonne) in the space of one week because of the latest credit tightening initiative, he added.

“We understand that lenders in Zhejiang province were told not to issue 60–90 day letters of credit to importers from 20–30 September.

“It is all very opaque, which is not really helping the general atmosphere. We are not sure whether the restrictions will still apply once the October holidays are over.”

The letters of credit restriction in Zhejiang affected sentiment throughout China, as it is in Zhejiang where many of the big end-users and traders are located, he added.

The negative mood is such that no great comfort is being taken from large increases in polyolefin imports in August. High density polyethylene (HDPE) imports, for example, rose by 27% month on month and 10% year on year to 320,517 tonnes, according to China Customs. Low density polyethylene (LDPE) imports were up by 43% month on month and a huge 113% year on year, at 169,520 tonnes.

Explanations for the strong numbers include international traders liquidating inventory in bonded warehouses in China in order to minimise losses. The resin was bought when prices were a lot higher.

Material is only registered as being imported once it leaves the bonded warehouses.

“I think some of the product we saw in the August numbers could have been sitting in the bonded warehouses for several months,” the sales representative added.

Further factors might be the inability to place volumes anywhere else, as demand in other markets such as Europe could well be worse than in China.

Saudi Arabian producers are also reported to be under pressure to place extra production of PP following the end of turnarounds and technical problems at three major plants.

The good news is that end-user inventory levels are said to be low, raising the possibility of a strong recovery in demand once the October holidays are over.

But despite international traders liquidating inventories, their stock levels are still high, according to some market sources.

A strong demand recovery would require a dramatic change in sentiment – and more central and local government support for hard-pressed small- and medium-sized enterprises (SMEs). The SMEs have suffered the most from the restrictions on credit that began late last year.

“What we need is a solid sign of improvement – an indication that the end-users are coming back to the markets in a big way,” said a Singapore-based polyolefins trader.

“If the biaxially oriented PP (BOPP) film buyers came back in a big way, for example, that would be very positive news. A typical BOPP converter buys 2,000–3,000 tonnes.”

One shred of current comfort is reports of operating rate cuts at several South Korean crackers.

European cracker-to-polyethylene (PE) producers have also lowered rates, and further reductions are expected, according to ICIS.

It is, however, going to take a lot more than a few operating rate cuts to rescue what looks likely to be a very difficult fourth quarter in China.

($1 = €0.75) 

Read John Richardson & Malini Hariharan's Asian Chemical Connections blog

By: John Richardson
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