INSIGHT: Traders, analysts argue for strong China polyolefins rally

23 January 2012 16:31  [Source: ICIS news]

By John Richardson

China will be on a week-long holiday (22-28 January) for the Lunar New Year festivities.PERTH (ICIS)--Chemicals traders live and die by short-term volatility, and of course by guessing the right direction of sudden dips and rises in pricing.

So nobody should be surprised that traders have been busy talking up the prospects for the China polyolefins market post-Lunar New Year, given that price increases over recent weeks appear to be mainly the result of intra-trade deals.

Strong crude and therefore naphtha prices, leading to a squeeze on naphtha-based producers’ margins, are other factors behind the expectation of a strong post-New Year rally. The producers, it is argued, simply must regain ground.

Last week’s outage at the Al-Jubail complex in Saudi Arabia  due to a power failure, is expected to add further support to the theory that we are about to see a sharp price rally.

On the demand side, the whole of 2012 is expected to be better than 2011 because of the Chinese government’s renewed “pro-growth policy”. Local stock markets have continued to rally over the last two weeks in anticipation of a big easing in bank-lending conditions.

For polyolefins industry planners, however, nothing has essentially changed for the positive since early January, when the modest rally in polyolefins pricing began. If anything, in fact, the longer-term direction of the market has become even harder to read.

Comments made by a Shanghai-based sales and marketing executive with a major Asian polypropylene (PP) producer illustrate the tough job of seeing through the smokescreen thrown-up by recent improvements in sentiment.

"Business is better compared with the end of last year. Traders have picked up some additional cargoes compared with December, especially the second-tier domestic traders in China because of the feeling that prices have bottomed out,” he said.

“But there has been no great improvement in end-user buying. The end-users remain very cautious and, indeed, so do the traders who are doing only back-to-back deals and don't want to hold cargoes for too long.

“The traders are also willing to take modest profits, say $20/tonne, compared with the big profits available in 2009-2010 - the dream years.

“The reason for this cautious, conservative approach is that many of the traders lost money last year because of a complete lack of visibility.

“In terms of the number of weeks when prices went down, as opposed to up, it was the worst year for the China market in a decade. Some traders went bankrupt, as did end-users.”

And, most significantly of all, he added: “Pricing has increasingly over the last few months been driven by what's happening locally in China - ie domestic production for domestic final consumption and imports used for local, final consumption. The reason is weak re-exports because of the problems in the west. This is not an overseas producer-cost driven market at the moment.”

This suggests that overseas producers might lack the muscle to push through price rises in the key China market, unless there are further major losses of supply to add to the outage at Al-Jubail.

Supply could instead lengthen in the first half due to the start-up of several new facilities in the Middle East. This year’s Asian cracker turnaround season also involves the shutdown of only 16 crackers compared with 33 in 2011, resulting in an estimated 50% reduction in lost ethylene production.

The irony about the demand outlook seems to be that the worse it gets, the stronger the rallies in the Shanghai Composite Index and the Dalian Commodity Exchange’s futures contract in linear-low density polyethylene (LLDPE).

A good example was the release last week of the preliminary HSBC/Markit Economics purchasing managers index for January.

Because the index showed a decline in manufacturing activity for the third month in a row, rumours spread of a more aggressive easing of liquidity conditions by the Chinese government, thereby driving up the stock market and the Dalian Commodity Exchange.

But the sales and marketing executive supported a widely held view that Beijing has very little room to manoeuvre on stimulating the economy.

“I don't think this year will be radically better than 2011 because the Chinese government cannot raise liquidity by too much, due to the risk of reigniting the inflation problem,” he said.

It is not only chemicals traders that have been arguing for a strong post-Lunar New Year recovery.

So have chemicals analysts who believe that Chinese chemicals and polymer demand growth in general is set to return to trend after an exceptionally bad 2011.

Their arguments are based on the notion that ethylene equivalent demand growth was way below last year’s 9.2% expansion in GDP due to tighter credit conditions and destocking.

Growth has to return to trend now that credit is being eased, leading to strong restocking, they believe.

Beijing's policies under its 12th Five-Year Plan (2011-2015), such as more social housing and better state healthcare provision, will boost consumer spending, they add.

The chemicals analysts might turn out to be right if 2011 was, indeed, an aberration.

But what if the events of last year indicate long-term, fundamental changes in China’s economy?

What if China can no longer be the main driver of global chemicals industry growth?

What is the chemical industry’s Plan B?

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

By: Nigel Davis
+44 20 8652 3214

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