China’s interest rate cut unlikely to affect weak petchem markets

08 June 2012 05:52  [Source: ICIS news]

SINGAPORE (ICIS)--China’s interest rate cut is likely to have little impact on the sluggish petrochemical markets in the short term as demand and crude prices are more influential, industry sources said on Friday.

The central bank lowered the benchmark borrowing rates by 25 basic points from 8 June, the first reduction since December 2008.

“The current market is too weak for players to take any brave action. The problem now is [the lack of] buyers, not the lack of money,” said a Chinese base oil trader.

“Everybody is selling, in fear that prices will decrease further,” said a fuel oil trader in east China.

The effect of the interest rate cut will be seen only in the long term, while buying activity in the short term will largely be decided by sentiment, sources said.

“In the long term, of course, when funds are not that tight, buyers would purchase more. However, the present market is so bearish, buyers are unlikely to turn bullish overnight just because of an interest rate reduction,” said a bitumen trader.

“The entire petrochemical chain is closely linked to crude values. If crude weakens, few petrochemical [prices] can strengthen,” said a solvent oil producer in China.

Analysts said the interest rate cut is probably an advanced reaction to the expected dismal economic data for May, which are set to be published this weekend.

The May data is likely to be worse than April’s, in which growth in industrial production, trades, fixed-asset investment and bank lending slowed down, analysts said. 

“Clearly, the disappointing data triggered the cut. The 25-percentage-point axe may only be a first test and if it fails to spur lending and investment as policymakers wish, more cuts will be taken later, “said Zhang Junfeng, a senior analyst at Shenzhen-based broker China Merchants Securities (CMS).

Zhang predicts that interest rates may be cut again once or twice this year.

Additional reporting by Alfa Li, Kim Lu, Victor Liu

By: Fanny Zhang
+65 6780 4359

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