INSIGHT: Slower China growth spooks markets, worries companies

01 June 2012 16:51  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Crude futures reacted sharply on Friday to China’s slowed manufacturing growth with the Brent front month price at one stage falling by more than $4/bbl.

Not surprisingly, chemical prices in Asia also dropped as markets absorbed the implications of a to 2.9 point fall in the offical Purchasing Managers Index (PMI) between April and May.

This has been a week in which the reality of slower growth in China has begun to hit home. Chemical and polymer markets have been signalling for some time that structural changes in China’s manufacturing economy and the deep uncertainty surrounding the country’s once in a decade transfer of political power are constraining growth.

BASF vice chairman, Martin Brudermuller, said in a newspaper article on Wednesday that Asia as a whole is not showing the momentum that might be expected. “The struggle over China’s future direction seems to be harder fought than we had imagined,” he told the Frankfurter Algemeine Zeiting.

BASF is clearly worried about Asia growth. It wants to be making 45% of its targeted €115bn of sales in 2020 in Asia, and China currently accounts for 50% of its business in the region. India is attractive but can be frustrating while markets in southeast Asia are offering more opportunities.

But when the world’s largest chemical company signals concerns about Asia growth many people sit up and listen.

Brudermuller said that, personally, he is convinced that China is “so firmly anchored in the global economy that it must remain on the path towards greater openness,” according to a transcript of his interview.

“But there are very intensive discussions being held in the party about the direction China should take, and various different factions are forming. For investors, the times when a project was unanimously rubber-stamped by politicians are over,” he said.

BASF’s capital projects in China remain on track, according to a company spokesman, and it is unlikely that the company would cut back. But business has been weaker in 2012.

BASF’s Asia-Pacific sales fell by 5% year-on-year in the first quarter and the region is becoming more vulnerable, Brudermuller said, with the euro crisis having an impact.

Slower China manufacturing growth has a direct impact on oil demand so prices have reacted. And the knock-on effect in chemicals is coming at a bad time.

Demand is weaker in Asia and weak in Europe.

Weak demand and poor olefins margins are forcing plant closures in Asia. Taiwan’s Formosa Petrochemical (FPCC), for instance, shut its largest cracker, a 1.2m tonne/year plant, located in Mailiao, Taiwan, on Thursday because of the worsening situation.

In Europe, cracker margins remain healthy but ethylene demand is weak despite a drop in the monthly ethylene contract price. The spread between contract olefins and derivatives prices looks stark. Prices are falling in the polymer markets because of weak demand in a difficult European industrial environment.

The sector is exposed at just the wrong time with the slow summer period approaching.

This week, the spread between contract and spot naphtha-based ethylene margins in Europe was the widest since the peak of the global financial crisis in December 2008, according to ICIS data. The spread between the two reached almost €490/tonne ($613/tonne).

($1 = €0.81)

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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