INSIGHT: China commodity PE demand growth struggles to match GDP

18 March 2013 16:42  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--What a difference three months can make. Back in December, polyethylene (PE) traders were, reportedly, stocking-up “like crazy” on the anticipation of a bumper year in the Chinese market.

The assumption was that the economic recovery of late Q4 2012 and January 2013, which was the result of perhaps politically motivated stimulus spending, would continue throughout this year.

But, as one Singapore trader describes, the outlook has radically shifted.

China’s demand for polyethylene (PE) is even lower than immediately ahead of the lunar new year break, which took place in mid-February, he said.

"For demand to be less than just before the new year, when most traders had already pulled out of the market to avoid cargoes being stranded at ports during the holiday period, is remarkable. In the ten years I've been in this business, this has never happened before," the trader added.

"Trading has come to a virtual halt and re-exports have increased." (Re-exports comprise resin shipped to China and held in bonded warehouses. When that resin fails to find a home in the domestic market, it is shipped to other countries).

"I got it wrong as I thought there would be a strong recovery after the holidays, but it didn't happen because of policy uncertainty,” he said.

“Most other traders are in the same position. We all thought monetary conditions would remain favourable.

"Restrictions on the property market, reduced liquidity in the banking system and lower new lending in February, have reduced PE buying.

"People are worried that Beijing will have to take more measures to cap property prices, as what has happened so far is unlikely to work. They think that eventually interest rates will have to be increased because overall inflation is also rising. This is further dampening activity."

But while the People's Bank of China (PBOC) is keen to take a more aggressive stance on inflation, government agencies, such as the National Development and Reform Commission, are eager to maintain the recovery, said an 11 March Reuters’ article.

February inflation was, however, at 3.2%, up from 2.0% in January, with the February rate close to the government's maximum annualised target of 3.5%.

The risk is that if the cost of living continues to rise at this pace, the PBOC might win the battle, leading to an increase in interest rates earlier than Q4 - the current consensus forecast.

"A rise in interest rates would be a major blow to the market," said the trader.

And even if pro-growth government agencies get their way for most of this year, the PBOC looks set to continue its policy of reducing liquidity as a tool to fight inflation.

A further reason to expect less credit in the system is that overall lending for January-February is ahead of the central bank's annualised target.

"Take January and February together and new loans are being extended at a 10 trillion RMB [yuan (CNY) 10,000bn] rate for the year [on an annualised basis], well above the RMB 8.5-9 trillion that Wang Jun, senior economist at the well-connected China Centre for International Economic Exchanges, believes the PBOC is tasked with for 2013," said Reuters.

Measures to control the shadow-banking system also seem likely. Total new credit, including loans through the informal or shadow-banking system and official lending, hit an all-time  high in 2012.

The positive news about the above influences on inflation is that they are within China’s gift to control.

But another factor behind the rising cost of living - the surge in global oil prices - is beyond China's control, unless it raises subsidies on fuel prices, which would be very expensive.

"Today, gasoline is at RMB 9630/tonne (CNY 9630/tonne) and diesel at RMB 8810/tonne compared to June 2008's peaks of RMB6980/tonne and RMB 6520/tonne," said Paul Hodges, chairman of UK-based chemicals consultancy International e-Chem in a 13 March post on his ICIS blog, Chemicals & The Economy.

"China's gasoline price for 90 RON is thus $4.60/US gallon ($1.20/litre) compared to current US prices of $3.75/gal. European prices are even higher at $8.00-$9.00/US gallon,” he added.

“The mood in China’s PE market is very pessimistic at the moment,” said an Asia-based source with a North American-headquartered polyolefins producer.

“Traders were stocking-up like crazy in December and January because they thought the recovery would last. At one point before the Chinese new year (lunar new year), some of them had more than a month’s worth of inventory compared with the usual two weeks.

“They have, as a result, been off-loading material to minimise their losses, but I haven’t heard of any re-export trade from China, although it seems possible.”

Traditionally, the Chinese market has saved the world, but the source added: “Whilst prices are rising in the US right now, they are falling in China.”

February contract negotiations for US PE ended with a split settlement with most film grades settling flat, according to ICIS

However, high density polyethylene (HDPE) injection and blow-moulding grades increased.

Meanwhile, China’s PE spot prices across all of the grades fell by $5-40/tonne during the week ending 15 March, added ICIS.  This marked the third week in a row of declining prices. China PE spot prices

“We are not only facing a period of weak demand, but also one of increased supply,” added the source with the polyolefins producer.

“Middle East  turnarounds are coming to an end in April-May and new capacity is starting up.”

But it is not all doom and gloom.

Despite the likelihood that China’s overall growth in polyolefins demand will again be less than the increase in GDP in 2013, some segments of the business are doing very well.

“Demand growth from higher-value converters, for example, those producing high moisture-barrier PE film, remains excellent.  It is in the high single digits,” said a source with a second polyolefins producer.

“These converters are now very successfully taking on the Europeans because they have become very sophisticated. They are producing excellent quality films as a result of high degrees of technical knowledge. And they are very cost efficient because of investment in automation.”

But he added:  “The consolidation process amongst lower-value converters has already played-out in the US and Germany, but is still taking place in China.

“Smaller converters are closing down in China, or are merging, as a result of higher labour and other costs.”

The other problem is that only around 10% of China’s PE market is non-commoditised, said the source.

This suggests a struggle for both volumes and profitability in the remaining 90% of the market during the rest of 2013.

Lower cost producers are, of course, in the best position to win this battle as southeast and northeast Asian naphtha-cracker operators once again struggle.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s
Asian Chemical Connections blog

By: John Richardson
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