INSIGHT: China PE producers struggle with sluggish demand

29 August 2012 12:57  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--Polyethylene (PE) demand in China grew by 53% in 2008-2010, whereas it grew by just 1.7% in the first seven months of this year compared with the same period in 2011, according to Global Trade Information Services (GTIS).

Dig into the data a little deeper and you find that PE demand growth during January-July 2012 was flat over the same seven months in 2010, adds GTIS (see table below).

China PE production and trade dataMiddle East producers continue to gain a bigger share in a weak market, as the data again shows. Their exports rose by 40% in January-July 2011 over the same period in 2010, as greater availability of associated gas enabled cracker complexes to run harder.

The effect on higher-cost naphtha-based producers, in terms of both market share and profitability, has been significant.

Northeast Asian (NEA) shipments to China are down by 32% over 2010.

And NEA integrated variable cost margins for low-density polyethylene (LDPE) have reached their lowest level since ICIS records began in 2000, as the graph below this story indicates from the ICIS Weekly Asian PE Margin Report.

The Middle East looks set to gain further market share in the fourth quarter as a result of new capacities.

Next month, the Saudi Polymers complex in Saudi Arabia is due to make its first on-spec shipments of film and blow moulding grades of high-density PE (HDPE). The complex includes two 550,000 tonne/year HDPE facilities and a 400,000 tonne/year polypropylene (PP) plant.

The 300,000 tonne/year Saudi Kayan low-density PE (LDPE) facility is also scheduled to start-up later this year.

As for the story behind the slump in demand, synthetic resins as a whole are still struggling with inventory problems dating back to the first quarter of 2011, said HSBC in a report released in June.

This helps explain why PE demand growth, and quite likely growth in all the other resins, is way below the expansion in overall GDP (gross domestic product). Second-quarter GDP growth was 7.6%.

Another explanation is that official headline growth numbers might have been overstated in order to mask the severity of the downturn.

This is an extraordinary turnaround and reflects deep macro-economic problems that are not going to go away in a hurry. The prospects for next year do not look good.

“Business owners who manufacture or distribute products as varied as dehumidifiers, plastic tubing for ventilation systems, solar panels, bed sheets and steel beams for false ceilings said that sales had fallen over the last year, and showed no signs of recovering,” wrote the New York Times in an August 23 article.

Inventories of unsold finished goods are piling up. For example, dealerships’ inventories of new cars are reported to have risen by 900,000 to 2.2m between the end of December and end of June.

And yet China’s auto manufacturing capacity is due to increase over the next three years by an amount equivalent to all the auto factories in Japan, and nearly all the production capacity in the US, according to the central government’s National Development and Reform Commission.

Stories of overcapacity in other industries suggest continued downward pressure on prices all the way upstream to chemicals and polymer producers.

The risk is that China might attempt to export its way to stronger growth, resulting in deflationary pressure overseas and international trade tensions, given that the global economy is so weak.

China’s export growth could be as low as 6% in 2012 compared with last year’s 20%, estimates Bank of America. Beijing’s target for 2012 is growth of 10%.

“The third quarter is a crucial period for realising full-year targets on export growth,” Wen Jiabiao, China’s premier, was quoted as saying by state-run media last week, during an inspection tour of Guangdong, the country’s biggest exporting province.He called for faster payment of export tax credits, greater use of export credit insurance and reduced inspections and fees.

The hope is that construction work on 500 or so infrastructure projects will benefit growth from Q4 this year.

But question marks have been raised over whether local authorities can afford all the projects, which have received fast-track central government approvals.

Further reductions in interest rates and bank-reserve requirements are also widely expected before the end of this year.

But evidence from polymer markets suggests that the cost and availability of financing is not the issue; instead it is the willingness to borrow money.

Small and medium-sized enterprises have lost their appetite for risk because of the weak economy, and because of uncertainties over economic policy ahead of the once-in-a-decade leadership transition.

From October this year, senior members of the politburo are due to be replaced, including the premier and president.

“The sooner we get the leadership change out of the way the better, as the focus right now is on politics rather than the economy,” said a senior Asian-based executive with a global poylolefins producer.

“My big worry is that the transition might take longer than expected, leading to a delay in introducing new pro-growth policies.”

A sales and marketing executive with a European speciality chemicals producer said that everything would be fine in the New Year, once the new leaders were in place.

"I think they will adopt very accommodative policies for growth,” he added.

But the new leadership will still be caught between a rock and hard place.

The rock is that the easiest way to get the economy booming again is through another big splurge on investment, with the hard place being that this could add to environmental and bad-debt problems.

Another huge investment-focused stimulus package, on the lines of that which caused PE demand to grow by 53% in 2008-2010, might also increase income inequality. Key objectives of the government’s 12th Five-Year-Plan (2011-2105) include lowering income inequality and boosting domestic consumption as a driver of growth, at the expensive of investment.

The luxury of time is a marvellous thing, but China doesn’t have that right now as it tries to rebalance its economy in a very difficult global environment.

NE Asia LDPE variable margins

Read John Richardson and Malini Hariharan's Asian Chemical Connections blog

By: John Richardson
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