INSIGHT: China must handle a different 2013 to what many expected

08 April 2013 14:22  [Source: ICIS news]

PERTH (ICIS)--“GET used to it. This is China for the rest of 2013,” said an Asian aromatics trader, referring to what he said was the exceptionally weak state of petrochemicals demand.

Everywhere you look it can be viewed as bad. For example:

*Asia’s purified terephthalic acid (PTA) spot prices dipped to a seven-month low on 1 April, according to ICIS. Prices subsequently rebounded on an improvement in China’s PTA futures markets, but polyester makers remained burdened by finished-goods inventories. In an effort to tackle oversupply and margin pressure, Chinese PTA producers increased production cutbacks in April. Overall Chinese PTA operating rates fell to just 60% in April from 65% in March.

*Benzene prices in Asia did recover for the week ending 5 April on stronger styrene. Styrene had picked up on Middle East production problems and a seasonal improvement in demand. Nevertheless, benzene tanks in China were close to full levels as importers evaluated delaying shipments or diverting cargoes elsewhere.

*The key polyethylene (PE) market continues to disappoint. Prices have fallen over the last month on demand weakness that has taken several producers and traders by surprise. Southeast and Northeast Asian integrated high-density PE (HDPE) margins remain the worst-performing across all the regions covered (see slide below):

Regional HDPE Variable Margins

Perhaps, though, the deep sense of disappointment amongst several traders and producers partly reflects unrealistic expectations about 2013 that dominated sentiment in early Q1. Markets might still grow, but less than had been forecast.

The problem was that people had thought that China would benefit from more economic stimulus during 2013. Instead, lower stimulus is taking place because of a major restructuring of China’s economy.

Another challenge that has come to the fore over the past two weeks is China’s financial sector, which, according to some commentators, represents a bigger systemic risk than the US sub-prime crisis.

But, as was the case with the mountain of evidence regarding the rapid pace of overall economic rebalancing, it has been obvious for several months that the financial sector would have to be dealt with this year.

For instance, US fund manager GMO, in a report that dates back to 22 January, said: "Between 2007 and 2012, the [China’s] ratio of credit to GDP climbed to more than 190%, an increase of 60 percentage points.

"China's recent expansion of credit relative to GDP is considerably larger than the credit booms experienced by either Japan in the late 1980s or the US in the years before the Lehman bust,” added GMO.

"Trust funds that finance cash-strapped property developers [which are part of China’s shadow-banking system] have a whiff of the sub-prime about them.

"Wealth management products [also part of the shadow-banking system] that bundle together a miscellany of loans, enabling the banks to generate fees while keeping loans off balance sheet, bear a passing resemblance to the structured investment vehicles and collateralised debt obligations of yesteryear, while thinly capitalised providers of credit guarantees are reminiscent of past sellers of credit default insurance."

The financial sector has grabbed a great deal of attention over the last two weeks because of new government initiatives.

On 28 March, for example, Bloomberg reported: "Investments in 'non-standard' credit assets, used by some banks to bypass loan restrictions and credit risks, cannot exceed 35% all funds raised from the sale of wealth management products, or 4% of the lender's total assets at the end of the previous year, the China Banking Regulatory Commission said.

"The latest rule may reduce total financing in China's economy by 1 trillion yuan, Citic Securities Co estimated in a note."

More measures are also being introduced to rein-in property prices.

Single adults with a permanent Beijing-residence registration, who have not made purchases in the city before, will only be allowed to buy one apartment, the city’s government announced on 30 March.

And on the same day, Shanghai authorities said that banks will be banned from giving loans to local residents who are buying a third apartment or more.

The two cities will also raise down payments for second-home buyers.

This follows the early March nationwide introduction of a 20% capital gains tax on second properties.

"More signs are emerging that major economic reform is underway," wrote ICIS blogger Paul Hodges in a 26 March blog post.

"Hence 1993's leadership transition may well provide a useful parallel for today's policy changes.

"The then president Jiang Zemin (kingmaker in the recent politburo appointments) and economics minister Zhu Rhonji initiated a major credit crackdown to curb speculation in the property market. Property prices dropped 40% in the major cities, and private sector GDP growth was just 3%."

Looking beyond 2013, project financing in China looks set to become harder.

Coal-to-chemicals was one of nine major industrial sectors that the China Banking Regulatory Commission warned was affected by overcapacity and other risks related to what it called "the economic cycle", in a 25 March announcement.

Thus, the commission advised the state-owned banks to exercise greater caution in extending further funding to these sectors.

The other sectors were real estate, engineering machinery, steel, nonferrous metals, cement, shipbuilding, wind-power equipment and photovoltaics.

One wonders whether the same lending caution might be extended to refinery-to-petrochemicals projects.

Getting used to a very different 2013 than many people had expected is only half the battle.

Evidence is increasing that the chemicals industry also needs to come to terms with a very different China over the long term.

Additional reporting by Becky Zhang, Ong Sheau Ling and Bee Lin Chow.

By: John Richardson
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