INSIGHT: China markets subdued while Western firms talk of growth

02 May 2012 15:25  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--China’s chemical and polymer demand growth is poised for a recovery in the second half of the year, according to several chemical industry observers and companies

One observer, for example, said: “I am still sticking with the view that even if growth in China and the rest of Asia is not spectacular, it will be sufficient to support reasonable levels of income growth for 3bn consumers of basic petrochemicals – whether it is in the form of food [or] consumer goods packaging, or in autos and residential construction.

"Given that announced capacity additions are low – and some will be delayed – the petrochemicals market will naturally tighten. We are looking at a multi-year up-cycle."

Andrew Liveris, speaking late last week following the release of Dow Chemical’s first-quarter results, said the company’s sales in the US, Germany and China all grew by double digits from February to March, excluding the seasonality of its agricultural business.

"Importantly, this momentum is ahead of what we saw last year. We also saw sales grow double digits month-over-month in all of our operating segments,” the Dow CEO added.

"China is stabilising and growth is likely to accelerate later this year, as their government keeps shifting its policies to inspire and incentivise domestic growth," he said.

It is possible to take the opposite view – that government policy aimed at a radical re-focusing of the economy will hinder rather than aid growth during the rest of 2012. The external environment might also get worse due to problems in the eurozone.

Chemicals markets will take cheer, however, from China’s April Purchasing Managers’ Index (PMI). The index rose to 53.3, up by 0.2 percentage points from March. This is the fifth consecutive month that China’s PMI has stayed above the 50% threshold, according to the China Federation of Logistics and Purchasing.

Most economists are also convinced that the decline in China’s economic growth has bottomed out.

But as yet, there is little evidence of a recovery in the chemical and polymer markets, according to ICIS. Prices are declining across many products – or at best failing to fully reflect high raw material costs, as reports persist of weak demand.

In polyethylene (PE), first-quarter demand has fallen by 4% from 2010, according to data supplied by Global Trade Information Services and the China Petrochemical and Chemical Industry Federation.

China PE production and trade

Chart prepared by International e-Chem

North American exports are down by 61%, despite the huge US shale gas advantage.

Talk to just about anybody involved on a day-to-day basis in the polyolefins market and they seem surprised by how weak demand has been so far this year – and what they say rarely inspires confidence for the rest of 2012.

For example, the head of an Asia-based polyolefins trading company said: “This year has been absolutely terrible, the worst I can remember in eight years in this business – and even worse than 2008. There is just no demand out there.

"There was supposed to be a recovery after the Chinese New Year, everybody seemed to be banking on that, but it didn't happen.

"Any activity that is taking place at the moment is almost entirely between the traders. The end-users in China are not interested.

"What's worrying is that the negative mood has started to spread from China to Vietnam and Indonesia, which have been better markets so far during 2012. End-users in Vietnam and Indonesia have started to pull back from orders.

"There are a lot of re-exports of PE from bonded warehouses in China because of the weak demand, which is reflected in the wide gap between import and domestic prices. The re-exports are mainly heading to Indonesia and Vietnam. This is one of the reasons why sentiment there is weakening.

"A lot of re-exported polypropylene [PP] from China is heading to India and South America.

"I think the reasons for end-users in China remaining so cautious include rising labour costs, the lack of availability of labour and credit.

"I heard about bank lending being increased in March by more than the banking analysts had expected, but we are not seeing any evidence of this among our customers. They remain short of credit. I think this is probably because most of our customers are small and medium-sized enterprises, and most of the extra lending has gone to the big companies.

"Uncertainty in general is still dominating the mood, whether it is over economic reforms and politics in China, politics in Europe and the US, the eurozone debt crisis [or] US economic growth.

"Labour costs have gone up hugely over the past six years. It used to be you could employ a worker in a packaging plant, a low-skilled manual worker, for [yuan [CNY] 800–1,000 [$128–160] a month. Now it costs [CNY]3,300 a month.

"What is strange is that there is a real shortage of unskilled workers, but a greater availability of skilled workers – and with a skilled worker, when you take into account greater productivity, you get better value for money.

"I have noticed a change in attitude among the 1990s babies compared with their parents. They expect wages to increase every year, they expect better living and working conditions and they expect not to have to work as hard.

"Another thing I am noticing among my customers is greater automation, as manual workers are harder to find and a lot more expensive.

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By: John Richardson
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