INSIGHT: China’s PE market developing at speed

03 July 2012 16:06  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--Everyone was a winner in China in 2009-2010, even those who knew very little about the polyolefins business.

“I was contacted by a Chinese trader in mid-2009 who I had never even heard of before,” recalled a Singapore-based trader.

“He asked me to supply as much polyethylene (PE) as I had available. I asked him what grades he wanted and he replied, ‘it doesn’t really matter, just send me whatever you have got.’

“It was then that a realised the market was overheating, but many of us rode the wave for a good deal longer and made excellent money.”

Last month, HSBC released a report that claimed synthetic resin inventories in general among traders in China are still high as a result of this type of speculative buying, even though the de-stocking process now stretches all the way back to the first quarter of 2011.

Other economic distortions left over from the 2009-2010 stimulus package include real estate prices in China’s first-tier cities that remain way beyond the affordability of the vast majority of people.

As a result, few economists believe that Beijing can afford to carry out economic stimulus on the same scale again, no matter how weak the global economy becomes.

Thus, making money out of the polyolefins business is likely to remain a lot more difficult than during those two golden years when everybody, even the highest-cost overseas producers, had no problem in placing volumes.

China is also attempting to move away from its export-focused growth model which guarantees, at the very best, a few years of adjustment as domestic consumption replaces lower export growth.

At the very worst, China’s economy could struggle with low GDP growth for many years if it fails to escape from its addiction to wasteful investment, claim some economists.  

This suggests that the easy ride many producers and traders enjoyed over most of the past two decades might also be over. During that period, demand for many imported chemicals and polymers has been buoyed by rapid growth in China’s export-based manufacturing industry.

“There is a whole generation of younger managers who have grown up thinking that you don’t need to control costs, that it is easy to make money from PE,” said a senior executive with a global producer.

But if you have the right cost base, the right products and the right customer relationships, the potential is enormous, he added.

“Seventy percent of the total PE film consumption in the US is into what I would categorise as higher-value packaging. In China, the figure is only 7-8%,” he said.

And while many small and medium-sized converters in China, producing low value plastic products, are struggling with higher labour and energy costs and a slump in export orders, the bigger converters continue to do extraordinary well.

“There is a group of plastic processors that are run by people who moved off the land in the 1950s-1960s and attended university, thanks to educational reforms,” continued the executive.

“They started out life with very little and now they have built absolute fortunes – some of them are literally billionaires.

“They have been told, in the clearest possible terms, that they must give back to society in order to help keep the Communist Party in power.

“This involves visiting their rural home towns in order to act as role models, to show people ‘this is what can be achieved under the current system’. They are also required to donate money to local schools, infrastructure etc.

“These companies are playing the game and, as a result, receive discounted land, tax breaks and other financial benefits.”

Company owners, in order to win government support, must also guarantee that they won’t move their wealth offshore to Hong Kong, Singapore or elsewhere, he added. 

“Capital flight has become a major concern of the central government. Many of the super-rich have been shifting their wealth overseas because they are worried about where their relationships will stand after the leadership transition later this year,” he said.

China’s president, premier and several other senior Politburo members, are set to be replaced in a once-in-a-decade change in leadership that is due to take place from October this year.

Surveys released last year by rich-list publisher Hurun Report and Bain & Co, the management consultancy, both estimated that 60% of about 960,000 Chinese people with assets of over yuan (CNY) 10m ($1.6M) had already begun the process of emigration or were considering doing so, wrote the Financial Times in a 24 May post on its beyondbrics blog.

The speed with which the polyolefins market is evolving in China’s developed southern and eastern provinces should not be underestimated, added the executive.

“To give you one example, we have been working with a producer of multi-layer plastic processing machines.

"Only a few years ago, this company was selling machines for a few hundred thousand dollars a year, but now it is charging more than a million dollars, and its machines are as good as just about anything manufactured in the West,” he said.

($1 = CNY6.35)

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

By: John Richardson
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