15 February 2013 09:49 [Source: ICB]
The chart below shows that China's polyethylene (PE) demand growth has been well below that of overall GDP for most of the years between 2006 and 2012.
This might support the argument, made by some economists, that economic growth has been too heavily focused on investment rather than consumption, given that the majority of PE goes into packaging and agricultural film applications rather than construction.
Use of recycled material slows down PE demand growth
In 2006-2008, for instance, a surge in resin prices, on the back of expensive crude, forced many plastic processors in China to switch to recycled material and/or to increase the use of fillers. Most of China's plastic processors are small and medium-sized enterprises (SMEs) with limited cash-flows.
In 2009, the recycling market dipped on new regulations and reduced availability. In 2009 and the first half of 2010 there was a huge increase in apparent PE demand growth (imports plus domestic consumption), partly because of the drop in the availability of recycled material.
The main reason for the rise in demand was China's giant economic stimulus package, introduced in late 2008 to mitigate the impact of the global financial crisis.
Polymers in general were being used as collateral for circular trades in other commodities and even property, as financing was much more easily available, thanks to a large increase in bank lending that was part of the stimulus package.
A trader would, for example, buy PE just to get the credit to trade in, say, copper or to buy a condo in Beijing.
There was also a big build-up in inventories of both resin and of finished goods made from PE, as the easy lending conditions made taking long positions seem like a one-way bet.
But then, from April 2011, credit conditions became a lot tighter as the government grappled with inflation.
The first to suffer were the SMEs, because of their poor access to credit, and so they began to buy resin on a hand-to-mouth basis.
SMEs have long struggled to access credit because the state-owned banking system is set up to serve the state-owned enterprises.
This became an even greater problem when credit was rationed from April 2011, leaving the SMEs last in the queue for state-owned bank lending. They were forced to either cut production or go to private lenders who charge very high rates of interest. Big stocks of both PE and finished goods made from PE, thanks to the credit binge, further depressed PE demand growth.
The first three quarters of last year seemed to be largely the same as the April-December period of 2011: a shortage of credit among the SMEs, while demand growth was depressed by lingering inventory problems.
But from May 2012, Beijing launched another stimulus package, albeit on a much smaller scale than the one introduced in late 2008. This latest package was designed to shore up support for China's new leaders as they prepared to take office, according to Paul Hodges of UK-based chemicals consultancy International e-Chem.
Up until the fourth quarter of last year, commodity and financial markets were full of the notion that China might be heading for a hard landing.
"Markets now believe that China will enjoy a sustainable recovery," said a resources analyst based in Perth, Australia. "Equity markets and oil and other commodity prices have also increased because people think the West is sorted out. I am not entirely convinced.
"A lot of the rise in Chinese bank lending and government spending in May-October 2012 seems to have gone to more unneeded infrastructure and has reinflated the property bubble." the analyst added. "Plus, I think the jury has to be very much out on whether the recent recoveries in the US and Europe can be kept up.
It could be argued, therefore, that there is no difference between this cycle and previous cycles in the PE business, for the reasons below:
As always, however, it is possible to take the same set of "facts" and end up with entirely different conclusions. A much more positive view of the world seems to be dominating thinking at the moment.
"You won't get much buy-in to a negative outlook at the moment because everyone is convinced that there is a ray of light," said a source at a global polyolefins producer.
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