21 September 2012 11:05 [Source: ICB]
The US Federal Reserve's decision to launch its third round of quantitative easing (QE3), a series of open-ended steps more radical than anything it has attempted before, has driven Asia petrochemical pricing higher, in response to the surging cost of crude.
Higher fuel prices would hit emerging-market consumers
Although most polyolefins buyers in China are said to have accepted September price rises, producers complain that these are nowhere near enough to compensate for rising crude and therefore naphtha and olefins costs. Price-hike requests have been severely limited by the weakness of demand.
Producers are expected to attempt to implement further price gains for end of September/early October material.
"We have no choice as the spread between ethylene and PE is as little as $50/tonne," said a source with a major Asian polyolefins producer.
A sales and marketing executive with a North American producer added: "The Asian naphtha-based producers are seeing great cost pressures in China and are therefore trying to export to better-priced markets such as Latin America, Africa and Russia.
"But this is offering limited help as long sailing times mean that Asian producers are not viewed as preferred suppliers. I am not sure if 2013 will be any different," said the executive.
The key issue for the Asian petrochemical industry is whether the US Fed move on 13 September, and the previous week's decision by the European Central Bank (ECB) to buy bonds, will eventually benefit real economies, rather than merely the traders in financial and commodity markets who have made the right bets.
In China, oil prices were already approaching a record-high before the Fed announcement.
For developing countries such as China and India, where per capita incomes remain low by Western standards, this is a very serious problem, as poorer people spend a larger proportion of their incomes on fuel and food than the rich.
For example, a Bloomberg survey, published on 30 August, estimated that US consumers are spending 2.8% of their daily incomes on gasoline. In India, despite heavy government fuel subsidies, a premium gallon of gasoline costs 37% more than the average worker earns in a day.
Rising fuel and food prices could already be hindering China's efforts to stimulate its own economy. Overall August inflation accelerated to 2% from a year earlier after a 1.8% rate in July, according to the National Bureau of Statistics.
Food inflation accelerated for the first time in five months, rising 3.4% from a year earlier.
Consumer prices increased 0.6% from the previous month, the biggest increase since January, while food prices increased 1.5% from July.
"China thought it had dealt with its inflation problem, thus giving it more latitude to further reduce interest rates and bank reserve requirements - the amount of money the banks have to set aside against lending," said a Perth, Australia-based investment fund analyst.
China lowered interest rates in June and July. It has also cut the reserve requirement on three occasions since last November.
Monetary easing has already produced positive results. In August, new local currency lending rose to yuan (CNY) 703.9bn ($111bn), way ahead of July's yuan (CNY) 540.1bn.
But as the analyst pointed out: "The August inflation numbers complicate the picture. China now faces renewed difficulties in trading-off growth versus inflation."
China's small and medium-sized enterprises (SMEs), which make up the bulk of the country's chemicals and polymer buyers, struggled with rising fuel and wage-cost inflation throughout 2011 and during the early part of this year.
Renewed inflationary expectations could, therefore, both restrict Beijing's stimulus options and squeeze the profit margins of the SMEs.
Despite the unexpectedly large rise in August bank lending, business confidence remains low, supporting the notion that China needs to provide more support for its economy.
"Any optimism [over the August bank lending] should be tempered by the fact that borrowing by firms, as opposed to households, remains weak," said Mark Williams and Qinwei Wang of Capital Economics, in a research note, quoted in the 12 September issue of The Irish Times.
"The further we dig into the data, the more sceptical we become that they are particularly encouraging. It is hard to see how the economy can be turned around unless firms decide to invest. There is not yet much sign of that happening on a large scale."
But some economists argue that while inflation might be a renewed problem for China's consumers, deflation is the issue for its manufacturers. Producer prices fell by 3.5% in August, marking the sixth month in a row that factory gate prices have fallen.
Manufacturing oversupply, resulting from weak global demand and the huge economic stimulus package of 2008-2010, could be another factor - along with rising consumer-price inflation - in restricting further stimulus efforts.
Glenn Maguire of the Sydney-based economics consultancy Asia Sentry Advisory said in a video on his company's website that the People's Bank of China has of late been reluctant to further reduce interest rates and bank reserve requirements because:
Yet another problem is escalating political tensions between China and Japan over ownership of islands in the East China Sea.
"QE3 offers an opportunity to make money from the stock markets, and it could also be seen as the right time to stock-up on PE ahead of further crude-oil price rises," added the source with the Asian polyolefins producer. "But if war between China and Japan did break out, and there is a real possibility that this could happen, the value of stock markets could halve overnight."
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