Market Intelligence: China petrochemical weakness persists

28 May 2012 00:00  [Source: ICB]

Petrochemical and polymers demand in China has never before been depressed for such a long period of time, say producers and traders.

Sentiment at the Asia Petrochemical Industry Conference (APIC) in Kuala Lumpur, Malaysia, was markedly bleak as prospects for recovery are being dampened by the eurozone crisis.

Asia acrylonitrileEven 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-honored 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 and polymers. 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 for monoethylene glycol (MEG). This had been expected to be a strong year for MEG as a result of tight supply and firm demand.

Weakness in polyester feedstock purified terephthalic acid (PTA) is much more understandable as Asia capacity is scheduled to increase by 36% during the second half of 2012, according to an analysis by 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%.

Asian acrylonitrile (ACN) prices are poised to fall further in June after tumbling in May because of poor demand from the downstream acrylic fiber sector, said a Japan-based trader at APIC.

"Fiber producers in China, who produce mainly for exports, are being hit hard by the eurozone after the uncertainty in Greece," said the trader.

Styrene serves as one more example of the long-term weak performance of many petrochemicals in China. Demand has been lackluster for months, as a result of persistently bad polystyrene (PS) and acrylonitrile butadiene styrene (ABS) derivatives markets. In terms of pricing, styrene, like many other petrochemicals, has suffered steep declines during the course of the past several weeks.

This has been due to weaker crude oil prices, the escalating eurozone crisis and evidence of slower-than-expected growth in China.

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

The much-anticipated improvement in demand after the May Day holidays in China from April 29-May 1 remains unseen.

RECOVERY DEADLINES

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

First, markets were supposed to bounce back in January after a dreadful fourth quarter of 2011. Then the rebound was supposed to manifest itself post Chinese New Year, which occurred in late January, and next after the holidays in May.

Producers and traders are now hoping that the eurozone problems will ease, leading to a pick-up in demand during China's peak manufacturing season, which takes place from June onwards. This is when China traditionally ramps up production of finished goods in order to meet demand in the West.

China stryeneBut when asked why conditions in the eurozone would get better, the best that attendees at APIC 2012 could offer as an explanation was that the crisis is so serious, the politicians would have to find a solution. The event took place from May 17-18.

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

But Wen Jiabao, China's premier, re-emphasized during the weekend ended May 20 that economic policy would merely be tweaked rather than overhauled. The focus will remain on reducing property prices and keeping inflation in check. 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 looser borrowing conditions.

LEADERSHIP TRANSITION

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

Delegates attending APIC 2012 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. We understand some of the reasons, but not all of them. We are still searching for a full explanation," said a sales and marketing manager with one major polyolefins producer.

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 polyolefins producer.

But, as with 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 chemical logistics supplier.

  • Additional reporting by Nurluqman Suratman and Clive Ong in Singapore

By: John Richardson
+65 6780 4359



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