INSIGHT: Players begin to think a lot harder about China demand

22 May 2012 16:22  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--Petrochemical demand in China has never before been depressed for such a long period, say producers and traders.

Even during the dark days of late 2008, when the global economy teetered on the brink of collapse, the retreat of Chinese buying activity only lasted a few weeks.

Demand soon came roaring back in time-honoured tradition as buyers anticipated that markets had bottomed out. Confidence was also buoyed by Beijing’s enormous economic stimulus package.

But demand has been weak for many months now across a range of petrochemicals. In the case of polyolefins, commodity-grade markets have been bad since April 2011 with the exception of a few brief flurries of rebounding demand.

The polyester chain has been dreadful for most of 2012, most notably mono ethylene glycol (MEG). This was supposed to be a strong year for MEG as a result of tight supply and firm demand.

Weakness in purified terephthalic acid (PTA) is a lot more understandable as Asian capacity is scheduled to increase by 36% in the second half, according to ICIS.

But explanations are still being sought over why Asian PTA demand growth is only expected to be 6-7% in 2012, compared with previous estimates of more than 10%.

Styrene serves as one more example of the long-term weak performance of many petrochemicals in China.

Demand has been poor for months, as a result of persistently bad polystyrene (PS) and acrylonitrile butadiene (ABS) derivatives markets.

In terms of pricing, styrene, like many other petrochemicals, has suffered steep declines in the past two weeks, as the chart illustrates. This has been due to weaker crude, the eurozone crisis and evidence of slower-than-expected growth in China.

For the week ending 18 May, CFR (cost and freight) China prices were down by $85/tonne.

Styrene spot prices China January to May 2012

“The much-anticipated improvement in demand after the May Day holidays (the public holidays in China earlier this month) remains out of sight,” wrote the ICIS styrene editor in Asia, Clive Ong.

Deadlines for recovery across the whole of the Asian petrochemical business keep being missed.

Firstly, markets were supposed to bounce back in January after a dreadful 2011 fourth quarter. Then the rebound was expected post Chinese New Year, which fell in late January. And next after the holidays in May.

Producers and traders are now hoping that eurozone problems will ease, thus leading to a pick-up in demand during China’s peak manufacturing season, which runs from June.

This is when China traditionally ramps-up the production of finished goods in order to meet demand in the west.

But when asked why the eurozone would get better, the best that attendees at last week’s Asia Petrochemical Industry Conference (APIC) could offer as an explanation was that the crisis was so serious, the politicians would have to find a solution.

Similar logic applies to China. The argument remains that because macro-economic indicators in April were so bad, the central government will have to launch a big new economic stimulus package.

But Wen Jiabao, China’s premier, re-emphasised in a media interview over the weekend that economic policy would merely be tweaked rather than overhauled. The focus would remain on reducing property prices and keeping inflation in check, he was quoted as saying.

As result, renewed economic stimulus might amount to little more than a few more reductions in the bank-reserve requirement.

But even if the government changes its mind and more aggressively attempts to reboot growth, it is debatable whether businesses in China will want to take advantage of easier borrowing conditions.

Confidence remains low and seems likely to remain so until after the leadership transition, which takes place later this year.

Delegates attending the APIC event in Kuala Lumpur, Malaysia, were struggling to come to terms with both the duration of the weakness in China – and just how bad demand had become.

“The extent of the fall in demand was unexpected. I have never known it as bad as this,” said a sales and marketing manager with one major polyolefins producer.

“We understand some of the reasons, but not all of them. We are still searching for a full explanation,”

Other attendees offered assurances that business would soon return to normal.

“This is just a classic tactic by the Chinese. As usual, they have stopped buying and are waiting for pricing to bottom out. The second half of the year will be strong. There is nothing wrong with the markets,” said a sales and marketing manager with a second polyolefin producer.

But, as with the Europe, attendees were unable to explain why buying in China would recover, beyond faith in politicians getting it right.

“Demand is the subject we have to debate, to think about a lot harder. It is not all about operating efficiency and feedstock advantage,” said a business analyst with a global chemicals logistics supplier.

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

By: Nigel Davis
+44 20 8652 3214

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