China polyolefins 2012 outlook

10 October 2011 00:00  [Source: ICB]

The end of a downturn always seems as if it is six months away. Human nature might be such that to expect things to stay bad for longer than half a year is too much to bear, especially if you are a polyolefins sales executive.

Phone call, Rex Features
 © Rex Features
Calls from traders, distributors and converters are down on last year
This is perhaps why the mood of three executives and two traders we interviewed is one of hope - perhaps over a realistic expectation - that conditions will improve in 2012.

"The market is very quiet indeed - there is just no confidence out there," says a Shanghai-based executive, who works for a major Asian producer.

He says it is very difficult for producers to shift volumes as there is so little trading activity and converters are buying only sporadically and in smaller lots. Average cargo sizes have fallen this year from 500 to 250 tonnes.

"One good way of assessing the mood is to monitor the number of calls you receive from traders, distributors and converters. Even on a good day, you will receive only one or two calls. Last year, you would receive dozens of calls in a day," he adds.

He believes China's polyethylene (PE) demand growth will be flat this year after increasing by around 12% in 2010 over 2009.

"I expect polypropylene (PP) to grow, however, by 4-5% compared with close to 10% last year." Apparent PE demand (production plus imports) in China rose by 53% in 2008-2010, according to Paul Hodges, chairman of UK-based consultancy International e-Chem.

The remarkable turnaround in fortunes is, according to all the contacts we spoke to, the result of the following:

  • Increases in interest rates and bank-reserve requirements as the central government has battled to control inflation. Small- and medium-sized enterprises (SMEs) have been badly affected by the reduction in credit as the better politically-connected state-owned enterprises have received most of the lending still available through the official banking system.
  • SMEs have had to source their credit from private lending companies - sometimes paying interest rates as high as 30%. This has, of course, reduced the ability of the SMEs to buy polyolefin raw materials.
  • SMEs that double as traders have really suffered as the Chinese government tries to rein in speculative activity blamed for driving up commodity, food and property prices. Last month, for instance, two traders/converters were reported to have gone bankrupt in Guangdong province, each owing yuan 100m ($15.6m).
  • Reduced confidence in the direction of crude oil prices. Until April, crude was on a bull run, resulting in resin traders and end-users stocking up on PE and PP in anticipation of further price rises. Oil prices have been more volatile since April on fears over the global economy.
  • A dip in consumer spending on autos as a result of higher interest rates and the end of government subsidy schemes, which we discuss on pages 30-31. Concerns over softening property prices are also said to have dampened spending in general. "The plastic food packaging sector is actually doing very well - but for a negative reason. People are eating in and spending less money in restaurants because they are worried about property prices and the state of the global economy," says a second sales and marketing executive with a global polyolefin producer based in Hong Kong.
  • An extremely disappointing peak manufacturing season in July-September because of macroeconomic problems in the US and Europe. This is when China's finished-goods manufacturers normally ramp up production to export goods to the West in time for Thanksgiving and Christmas. "The peak season was the worst I can remember in more than 10 years in the business," says a Singapore-based polyolefins trader.
  • A big build-up of inventory from resins all the way down to finished goods during the great credit surge of 2009-2010. Lending doubled in 2009 to $1.4 trillion, equivalent to around one-third of total GDP (gross domestic product). This helps to explain the extraordinary 53% rise in apparent PE demand in 2008-2010. As traders have gone bust because of the tighter liquidity conditions described above, resin stocks in warehouses have been sold in large volumes, suppressing prices and reducing demand for new material.

Hopes for 2012 being a better year rest on Beijing's ability to loosen liquidity if and when it brings inflation beneath whatever annualised target it sets for next year. The 2011 target - raised to 5% from 4% - still looks likely to be missed because of what economists fear are strong underlying inflationary pressures.

In August, for example, non-food items that help make up China's consumer price index rose by 3% - their quickest rate in a decade. Real-estate costs have soared as a result of speculation that was funded by the 2009-2010 increase in bank lending.

WAGE RISES

Wage costs in some provinces in China increased by 20-30% last year as local governments sought to address rising social unrest on widening income disparities.

Beijing's policy is for more wage rises as it tries to create what Hu Jintao, the country's president, calls "inclusive growth". Some economists believe that China has entered a new stage of economic development. This will mean inflation at 4-6% or more over the next decade compared with 2-4% over the past 10 years. So, unless the central government adopts a more relaxed approach to inflation targets, liquidity is going to remain tight.

Specific measures have, however, already been introduced to help the hard-pressed SMEs access credit in Zhejiang province and Shanghai city, with Beijing indicating in early September that it was going to take nationwide steps.

But China remains heavily dependent on the West for its growth because of its export trade in manufactured goods.

"I don't see a strong 2012 for China unless the West avoids a new recession. We can only hope," says a second polyolefins trader, who is based in Hong Kong. Amid weak demand-growth for polyolefins, the importers will suffer the most as China has significantly increased its self-sufficiency.

"Sinopec continues to increase capacity as it regards petrochemicals as a utility, supplying product reliably to downstream factories to keep employment high. It aims to become the world's biggest ethylene producer by 2014," says Paul Hodges.

PE import growth is expected to remain strong from 2011-2015, according to the chart above from CBI, an ICIS service in China.

But, as you can see, PP imports are expected to dip from 4.8m tonnes in 2010 to 3.34m tonnes in 2011 and are forecast to range between 3.0m-3.4m tonnes in 20122015.

Domestic demand for both products is still expected to grow very well until 2015 on the assumption of many observers and polyolefin companies that China's economy will quickly emerge from this soft patch.

But what if domestic demand remains weak as local production continues to be ramped up? As China becomes a bigger polyolefin exporter, where would all these extra volumes be placed?


By: John Richardson
+65 6780 4359



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