Market Intelligence: China must grow

26 October 2012 16:12  [Source: ICB]

Talk of a recovery in Asian petrochemical markets in the fourth quarter of this year has all but evaporated with the focus instead switching to prospects for 2013.

China graduates Rex Features

Rex Features

China needs its GDP to match the growth of its workforce

The first quarter is largely expected to be a write-off, given the Chinese New Year holidays, continued political uncertainty in China and a persistently weak finished goods export environment to the West.

But confidence is being expressed that by the second quarter of 2013, demand will have rebounded in the key China market as a result of more government stimulus and strong, long-term growth fundamentals.

"Some of our customers are talking about GDP growth in China of only 5-7% next year, but we think that is far too pessimistic," said one polyolefins sector player. "We think that growth has to be kept at 7.5%, and, therefore, will be maintained at that level."

Several senior petrochemical industry executives point to the need for stable employment growth as a reason why more government stimulus is on the way.

"There are 7m-8m new graduates entering the jobs market every year, so GDP growth of only 5-7% would be close to a social disaster as it would create far too little employment, " the sector player added.

"We think that the new government, no matter whether they are hard liners or reformists, will have the political will and the flexibility to further stimulate the economy."

China's once-in-a-decade leadership transition is due to take place in mid-November, when the names of the new president and premier, along with several other senior Politburo officials, are scheduled to be announced.

It would be hard to exaggerate the degree of uncertainty, and quite often negative sentiment, generated by the protracted leadership tussle.

Plastic processors have reportedly delayed investment in new equipment on fears over the political future, and there are widespread accounts of a great many wealthy Chinese moving themselves, and their wealth, overseas.

Concerns remain that there is still no consensus on China's long-term economic direction. If the hardliners, or conservatives, win, worries persist that China will stick largely to its investment-focused growth model, leading to more bad debt problems, more environmental degradation and more asset bubbles that would widen the gap between the rich and the poor.

Alternatively, a victory for the reformers might lead to a painful period of economic adjustment, during which GDP growth would be lower than over the past decade, as greater domestic demand is stimulated at the expense of investment.

The other view, and one shared by the several petrochemical industry executives, is that income growth in China, along with increased urbanisation, virtually guarantees strong demand growth for their products.

They support the arguments of analysts such as those at HSBC, who in a report released on 15 October - The Rise of the Emerging Markets Middle Class - wrote: "Between now and 2050 the average Chinese worker's income will increase seven-fold with individual income per capita rising from close to $2,500 per year to almost $18,000 per year.

"With a population of 1.4bn people today, that's a lot of people becoming a lot richer.

"The risks to these estimates are to the upside. We don't assume China 'catches up'. In fact, we forecast ­income per capita in 2050 will still be only a third of that of the US. It is more than probable that growth in income will be even greater than this."

Urbanisation is still only just over 50% in China, compared with around 80% in the West, added the industry executives, creating lots more growth in chemicals and polymers as people migrate to the country's cities and towns.

But demographics remain a problem for China, as its population ages before it has had the opportunity to become rich.

"China's population has been ageing since 2000, according to UN definitions," wrote David Pilling in a 5 October Financial Times article. "From 2015, when the working-age population will start to shrink, the demographic dividend China has enjoyed for so long will crank into rapid reverse.

"This is all happening much quicker than in other countries that trod a similar development path."

Still, the dominant investment thesis remains that everything will be fine with China, and this theory is even said to have inspired recent polyethylene (PE) trade flows.

Even though current PE demand is very weak in China, with flat growth expected for 2012, total PE imports in August (the latest figures available) rose to 817,277 tonnes from 681,100 tonnes in July.

Low density polyethylene (LDPE) shipments increased month-on-month by 27%, high density polyethylene (HDPE) by 21% and linear low density polyethylene (LLDPE) by 15%.

"Traders have speculated on a strong recovery in demand from the second quarter of next year, when China's new leadership is firmly in place," added the polyolefin industry player.

"Meanwhile, the current market has been made worse by the fact that the surge in imports has mainly gone into inventory. Local distributor stocks are very high."

He added that this was a factor behind recent declines in pricing. Asian pricing for the week ended 12 October fell by $5-45/tonne, according to ICIS.

There are obvious risks in stocking up in the current very uncertain economic and political environment.

Risks not only include the progress of economic reform, but also the continuing East China islands dispute with Japan that shows no signs of resolution.

Concerns persist that if military conflict breaks out that oil prices would quickly increase to $120-150/bbl. Petrochemicals pricing would, in response, also increase but would then swiftly collapse given the weak demand fundamentals, warn industry executives.

But since when has anybody made money out of China without taking some kind of gamble?

By: John Richardson
+65 6780 4359

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