23 December 2011 15:19 [Source: ICIS news]
By John Richardson
PERTH (ICIS)--Placing your trust in politicians “to do the right thing” can hardly be described as a strategy.
But for the polyolefins industry, confronting what is likely to be a very difficult 2012, there is little that can be done apart from hoping that Europe’s politicians resolve the eurozone crisis.
If the eurozone collapses, the implications will be global – and severe. For example, Europe was China’s biggest export market for manufactured goods in 2011.
“I have estimated that 40–45% of all polymers imported into China end up being re-exported as finished goods to the rest of the world,” said one Middle East-based chemicals analyst.
“Others, however, think that the re-export trade only accounts for 20%.”
But neither of these estimates can possibly take into account the overall effect on China’s economy – and therefore petrochemicals consumption – of a sharp decline in exports to Europe. The reason is that nobody has a clue about the final impact.
Hence, the only hope for a successful 2012 was that the politicians would sort this mess out, according to delegates on the sidelines of last week’s Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai.
“Average European cracker operating rates were 70% in October and 50–70% in November,” said an industry observer.
“There will be no recovery in Q1, but I think that the European crisis will be sorted out later next year, after it has become evident that the [problematic] European countries have bitten the bullet and have instigated proper austerity programmes.
“This will allow [German Chancellor] Angela Merkel to sell a rescue package for Greece, etc, that will fully deal with the debt problems.”
The head of olefins and polyolefins for a major European producer said that the first half would be bad, but by the second half of next year, “everything will be sorted out because the politicians will have to do the right thing”.
Inventory levels were reported to be low, as buyers had been acquiring material on a “hand-to-mouth” basis for months – in Europe because of the eurozone crisis, and in China because of tighter local credit conditions and fears about Europe.
But European and Asian buyers remained firmly camped on the sidelines, the delegates added. Caution was said to be the name of the game, as nobody wanted to be left holding high-priced stocks in the event of a collapse of the eurozone and, therefore, of the oil price.
The China market, where pricing is still weak as the chart shows, had not benefited from the 50 basis point cut in bank-reserve requirements in November, said one Singapore-based polyolefins trader.
“It is really, really bad out there, as liquidity is still very tight. There is just no confidence, as smaller converters and traders are continuing to go bust,” he added.
“The Chinese New Year excuse for weak markets is being used much earlier than usual.
“The market packed up for the New Year two to three weeks ago, even though it doesn't occur until 23 January. We would normally expect business to only start winding down in early January.”
In Europe, markets began to quieten down ahead of Christmas as early as September–October.
A reflection of the lack of risk appetite among overseas and domestic traders in China was the preference for trading on the Dalian Commodity Exchange over physical cargoes, the polyolefins trader added.
“The Dalian futures contract that closes in January was recently trading at yuan [CNY] 8,700–9,000/tonne [$1,372–1,420/tonne, €1,052–1,088/tonne] for film-grade linear low density polyethylene (LLDPE).
“This compared with physical prices of CNY9,300/tonne, and so there is, perhaps, a mild upside potential if sentiment improves and the Dalian rallies in response.
“It is the scale of the risk that also matters, though. When bank lending was plentiful in 2010, nobody thought twice about buying local physical cargoes, even though the requirement was – and remains – 100% upfront cash deposits.
“On the Dalian, the margin call is only 20% of the cost of each contract, and so your ability to leverage is automatically five times higher.
“Plus, if you close your position on [the] Dalian before a contract matures, as most people do, you don’t have to take physical delivery of PE [polyethylene] that these days would be very hard to sell.
“The futures exchange is giving traders something to do, somewhere to make money, as there is so little real business out there.”
A return to much-stronger volumes of “real business” needs to happen soon, otherwise more questions are going to be raised over the longer-term outlook for the industry.
“Once we get the eurozone crisis out of the way – and it will be resolved, I believe – there is not enough new ethylene capacity being planned over the next few years. As a result, there is room for all the planned US capacity additions,” said a second industry observer, again at the sidelines of the GPCA meeting.
But while Europe might dominate everyone’s thoughts at the moment, there are also doubts over whether the right political decisions will be taken to fix economic problems in the US.
And in China, bad debts left over from the huge 2009–2010 economic stimulus package threaten to de-stabilise its economy – unless, again, politicians find a solution.
($1 = CNY6.34, €1 = CNY8.27)Bookmark John Richardson & Malini Hariharan’s Asian Chemical Connections blog
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