INSIGHT: Struggling China SMEs force polymer, chemicals demand down

10 August 2012 14:45  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--First-half GDP growth in China was, after all, still a very healthy 7.8%, which, by the standards of any other country, was spectacularly good.

But chemicals and polymer industry executives have been saying throughout this year that what is happening at ground level feels very different from the headline growth number.

One reason is that inventories continue to clog-up the synthetic resin supply chain, all the way from polymer producers down to finished goods, according to a HSBC report released in June.

Another factor behind the pessimism that pervades just about every discussion with sales and marketing executives responsible for China is the continued problems faced by small and medium-sized enterprises (SMEs). The SMEs are responsible for the bulk of the country’s chemicals and polymer buying.

"China's economy feels as if it is actually shrinking and the situation is now worse than during the financial crisis," said an Asia-based senior executive with a global polyethylene (PE) producer.

"The SMEs have less money than they had in late 2008. The reason is that the banks are not prepared to lend money to the SMEs because they are worried about rising bad debts and the effect on their share prices.

"In the past, when the government had more control over the state-owned banks, they could order them to lend to anybody, but now the banks are partially listed and so have to also listen to their shareholders.

"The big companies still have easy access to money. But smaller plastic processors are running at operating rates of below 60% compared with 90-100% in 2010."

Banks are worried about SMEs going bust.

“Some 20,000 SMEs are expected to go bankrupt in the Guangzhou city area alone [a city in southern China] in 2012,” said a Singapore-based polyolefins trader.

“As far as the privately-owned small business sector goes, there is little confidence to either lend or borrow money.”

A vicious circle is developing: As the number of SME bankruptcies increases, bank lending is being further curtailed resulting in even more bankruptcies.

There has been a lot of talk of increased government economic stimulus in the second half of 2012 leading to a rebound that will benefit every sector of the economy, including the SMEs.

Some economists, however, have expressed concern that this stimulus will mainly focus on local government infrastructure projects that will add to bad-debt problems and cause further environmental damage.

There are also doubts over the degree to which small businesses will benefit from building more roads, bridges and airports.

The polyolefin industry executive believes Beijing doesn’t want to make any major economic-policy decisions ahead of the once-in-a-decade leadership transition. Senior members of the politburo are due to be replaced from this October, including the premier and president.

“The current leadership is just biding time until the changeover,” he said.

He added that only a few months ago, China was struggling to deal with inflation as a result of the overheating of the economy caused by the huge economic stimulus package introduced in late 2008.

“Now the government is extremely worried about deflation,” he said.

China's consumer price inflation slowed to a 30-month low of 1.8%, compared with the same month in 2011. In June of this year, prices had risen by 2.2%.

Producer prices fell by 2.9% year on year in July as against a 2.1% decline in June 2012.

"This reflects what our customers in China have been telling us for several months now," said a Singapore-based sales and marketing executive with a second global PE producer.

"While they have seen their costs increase as a result of higher wages and more expensive fuel costs, they have been losing pricing power because demand is so weak.

"On a recent trip to China, I was also really surprised by how sentiment among the final consumers seems to have changed.

“People don't want to spend money in the shops because they are worried about losing their jobs. They are also delaying purchases because they think prices are going to fall."

China’s crude steel output may decline for the first time in 31 years in 2012, a senior industry analyst wrote in a report published on the state-backed China Iron and Steel Association’s website, according to a 6 August Wall Street Journal report.

Steel production is seen as a benchmark for wider industrial activity.

A weaker economy is also reflected in petrochemicals demand data.

For example, PE demand fell in the first half of this year, according to Global Trade Information Services.

First-half demand, as the chart below shows, was down by 1% (red column) versus the first half of 2011 (green), and was down by 3% versus the first half of 2010 (blue).

China PE production and trade data

Imports were also down by 9% versus 2010 with exports up by 82%. The exports represented re-exports, after traders had failed to find customers in China.

“The sooner the leadership transition is finished the better, as we should then see economic policies that get the manufacturing sector going again,” added the senior executive with the first global PE producer.

“The good news about the threat from deflation is that it gives Beijing lots of flexibility to stimulate consumer spending. I am optimistic for next year.”

But China’s new leaders might well still face a weak export environment because of economic problems in the West.


By: John Richardson
+65 6780 4359



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