Commentary: The pain in Spain hits the global chemical market

04 June 2012 00:00  [Source: ICB]

The country's banking crisis and rising debt yields are further dampening global chemical market sentiment. But could monetary easing by China's central bank turn the tide?

Once again Europe's troubles are dominating market sentiment. On top of concerns about Greece's potential exit from the eurozone, now the precarious position of Spain's banks is coming to the fore. This only means tougher times for the global chemical sector as it battles already weak downstream demand.

Spain's financial woes are dampening chemical demand Copyright: RexFeatures

Spain is planning a €19bn ($24bn) bailout of major lender Bankia to be funded by the sale of government bonds after the European Central Bank (ECB) opposed a bailout using ECB funds. But it is getting more prohibitive to raise that financing, as the yield on Spain's 10-year note jumped to over 6.6% on May 30, while the yield on Italy's 10-year paper climbed above 6%. As these borrowing costs rise, the likelihood that the countries will be able to pay down their debt loads falls.

Already we are seeing cracks in the key automotive and construction end markets in Europe, which bodes ill for the chemical markets (see cover story on page 10). Tire sales are skidding, pressuring styrene butadiene rubber prices. Meanwhile, demand for polycarbonate (PC) from the Southern European automotive sector is particularly weak, as is demand for epoxy resins from the automotive, wind energy and construction sectors.

The evolving developments in Europe are clearly having an impact on sentiment as well as demand worldwide. China polyethylene (PE) prices continued their descent in the week ended May 25, mainly on concerns about the eurozone crisis. However, some are pinning their hopes on Premier Wen Jiabao's statements that China must give more priority to stabilizing economic growth.

China linear low density PE (LLDPE) futures prices rose from last Monday to Wednesday on hopes of further monetary easing to stimulate the economy.

Vincent Andrews, analyst at US-based investment bank Morgan Stanley, also believes this could lead to a bottom being reached in China's PE market. "Local Chinese demand remains strong, but remains masked by destocking, EU export demand weakness and an influx of Iranian product. Potential near-term China policy easing/stimulus could lead to a positive inflection in overall demand," he said in a May 30 report.

Andrews contends that China PE demand "remains robust," and that data for retail sales and personal consumption support his thesis.

Janos Gal in London, Bee Lin Chow and Summer Zhang in Singapore and Amy Yu in Shanghai also contributed to this article

By: Joseph Chang
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