INSIGHT: No rebound for China

04 June 2012 16:02  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--In early 2012, financial analysts and petrochemical companies were queuing up to claim that China was set to enjoy a strong rebound after the disappointments of last year.

It was hoped that a better global economy would combine with more economic stimulus in China to result in pricing power being firmly in the hands of the petrochemical industry.

How times have changed.

“Earnings estimates for South Korean petrochemical companies will have to be cut by 50% for the full year 2012,” said an industry observer.

"It is quite clear that the first quarter was dreadful for the South Koreans and the second quarter will probably be even worse. The second half would have to be a huge improvement for current earnings estimates to be achieved, and I just don’t see that happening.”

The South Koreans, along with Asia’s other naphtha-cracker operators, are struggling because of extreme price sensitivity among end-users in China.

Only the Middle East appears to be equipped, thanks to its feedstock advantage, to match the price expectations of China’s hard-pressed buyers, who have been squeezed by higher labour costs, increased energy costs and a collapse in export orders to the West.

But even Middle East producers are being forced to frequently cut prices in order to shift volumes, according to the observer.

Trade data, provided by Global Trade Information Services and the China Petrochemical and Chemical Industry Federation, confirm the plight of Asia’s naphtha-based players.

China PE production growth stalls
Chart prepared by International eChem and ICIS

Middle East producers saw their polyethylene (PE) exports to China increase by 33% in January-April of this year compared with the same periods in 2011 and 2010, as Northeast Asian exports declined by 40%.

The 14% increase in Southeast Asian (SEA) shipments was likely due to reduced imports tariffs resulting from the ASEAN-China Free Trade Area.

Some Thai and Malaysian crackers are also ethane-based. Although ethane costs in Malaysia and Thailand are not thought to be as low as in Saudi Arabia, this would still have provided an advantage over naphtha-dependent competitors.

Operating issues in Saudi Arabia prevented the country’s cracker complexes from running at high rates during the first quarter, the observer added.

These included a power failure at the Al-Jubail site in late January.

“Production was down by only a few percentage points in the first quarter but, when you are as big a producer as SABIC, that is a lot of lost volume,” he said.

If these problems are resolved, more shipments from the region to the key China market might well be the result, exerting further pressure on the Asian producers.

More volumes are also expected to soon hit the market from polyolefin start-ups in Saudi Arabia and Qatar.

The Saudi Polymers plant in Saudi Arabia was scheduled to be on-stream by the end of May. This comprises two 550,000 tonne/year high-density PE (HDPE) plants and a 440,000 tonne/year polypropylene (PP) facility.

QAPCO was due to bring on-stream a 300,000 tonne/year low-density PE (LDPE) facility in Qatar by the end of May.

And Saudi Kayan Petrochemical Co's 300,000 tonne/year LDPE plant is scheduled to start-up in Saudi Arabia in the third quarter.

The 6% decline in China’s PE apparent demand (imports plus domestic production), which is included in the chart above, underlines just how unexpectedly weak the market has become.

But while the industry observer, and several traders and producers, worry that the second half of the year will be no better, perhaps even worse, others are more confident.

“The (Chinese) government simply has to do something drastic as it cannot allow GDP (gross domestic product) growth to fall below 7% per year, otherwise it faces major unemployment issues,” said a European chemicals trader on the sidelines of last month’s Asia Petrochemical Industry Conference (APIC) in Kuala Lumpur, Malaysia.

“As a result, I think we are going to see a big economic stimulus package.”

On Tuesday of last week, it looked as it if it was right. Asian equity markets were lifted by rumours of a stimulus package on the scale of the 4 trillion Yuan ($585bn) that was pumped into the economy from late 2008 onwards.

Sadly, though, the rumour didn’t last long: On Wednesday Xinhua, China’s official news agency, published an article saying that the government had no plans for economic stimulus on the scale of 2008.

The article was also in line with the views of mainstream policymakers, quoted in other Chinese publications, who dismissed the possibility of any repeat of the post-Lehman Bros rescue act.

“The rumour was clearly a load of nonsense as the government is still struggling from the fall-out of that earlier stimulus package, including a steep increase in non-performing loans," said the observer.

"It was a good story while it lasted and was a classic case of buy on the rumour and sell on the fact.”

South Korean petrochemical stock prices rose by 5-10% when the rumour broke, but then declined again when it proved to be false, he added.

But a more modest stimulus package does appear to be in the offing, according to media reports, even though there has been no official government confirmation.

The package is reported to include building more roads and airports, and more investment in advanced equipment manufacturing and energy conservation.

There is talk of another cash-for-clunkers programme, where auto owners would be given incentives to swap their big cars for small cars. Reports also suggest that subsidies for purchasing home appliances, introduced with such a dramatic effect in 2009, might once again be on the cards.

Global markets reacted swiftly to the report on Friday that China’s Purchasing Managers Index (PMI) declined to 50.4% in May, down by 2.9 points from April, with Brent crude futures losing around $4/bbl.

Of deeper concern has to be the sharper 4.7 point decline in a new orders sub-index to 49.8% in May. Analysts say the fall indicates a likely reduction in manufacturing operating rates.

In light of the weakness in the first half of 2012, therefore, can modest stimulation really be enough to prevent a severe downgrade in earnings estimates for many petrochemicals companies, not only those in South Korea?

And, of course, there is nothing China can do about Europe.

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


By: John Richardson
+65 6780 4359

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