INSIGHT: Slower China growth threatens longer PE markets

10 June 2013 16:12  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--Asia’s polyethylene (PE) market has enjoyed a welcome recovery over the past few weeks, thanks to what producers and traders say has been a delay to the start-up of new capacity.

A further factor behind the rebound has been a determination amongst traders to stick to higher June offers in the key China market. The traders paid more for June imports compared with May.

But the key question is whether the recovery can last in the face of increased supply as new capacity is expected to soon hit the market. In addition, confidence in the China market remains at best fragile and, in the worst cases, very weak indeed.

“What has driven prices up is that new supply hasn't hit the June market in volumes that people expected," said a source with a global producer.

"Converters had held back from the market in May, expecting bigger volumes to arrive, and, as a result, have been left a little short of material. This has led to a mild flurry in buying."

Polyethylene ChinaOn 30 May, ExxonMobil reportedly announced that it had started production at its new 1m tonnes/year cracker at Jurong Island in Singapore, which will feed two 650,000 tonnes/year linear low-density polyethylene (LLDPE) plants at the same site.

"The problem is that the market had expected the cracker and the downstream plants to be on-stream in April," the source added.

A Singapore-based trader agreed, adding that output from the ExxonMobil plants and Wuhan Petrochemical in China could soon substantially lengthen the market. Trial runs are expected to be conducted in June at Wuhan's high density PE (HDPE) and LLDPE plants, the capacities of which are each 300,000 tonnes/year.

"Downstream demand in China also remains essentially very poor. People are on the whole still buying hand-to-mouth," said the source with the producer.

And the Singapore trader described 2013 to date as "pretty much of a disaster for the trading community. We built up stocks before the Chinese [Lunar] New Year, expecting a recovery after the holidays that didn't happen. Volumes have remained much below what most of us budgeted for."

The problem for traders and producers alike seems to be that they expected the Chinese economy to better this year rather than worse. As recently as February, the consensus view was that a stronger global economy, and increased economic stimulus by China’s new leaders, would accelerate GDP growth.

Instead, the reverse has occurred.

"Stretch-film producers in China are suffering particularly badly because of the lack of demand for packaging material from the electronics sector," continued the source from the PE producer.

"Export orders for computers, TVs etc seem to be way down on 2012 because of the state of the global economy."

This wasn't the impression created by the overall value of April export orders, which year-on-year surged by 14.7%, according to official government figures.

But for several months now, customs data have been questioned because of claims of over-invoicing. Traders have been over-invoicing, mainly via Hong Kong, in order to smuggle hot money into China for speculation on property, say some economists.

On Saturday 9 June, what is likely to be the real state of state exports was revealed. May export orders were reported by Chinese officials to have risen, year-on-year again, by just 1% - the slowest growth for 10 months. This followed a crackdown on over-invoicing by China's General Administration of Customs.

Other disappointing macro-economic figures were also released over the weekend.

For example:

*China’s consumer inflation slowed to 2.1% in May, the lowest in three months

*Producer, or factory gate, prices fell by 2-9% - the biggest decline since last September China’s manufacturing sector remains burdened by overcapacity. Chen Letian, an economist at Rising Securities in Beijing, estimated that the average factory capacity utilisation rate in China was just 57% in 2012. Overcapacity is also a problem in several petrochemicals. Polyvinyl chloride (PVC) is one of the most prominent examples with average operating rates at just 55% in 2012, according to ICIS China.

"Central bank data showed that Chinese banks lent 667.4bn yuan [$108.9bn] in new loans in May, missing market expectations of 850bn yuan and lower than April's 792.9bn yuan,” wrote Reuters in a 9 June article.

The chart below, compiled by UK-based chemicals consultancy International e-Chem from official government figures, shows that China’s bank lending is down by 16% in the year-to-date.

Chinas monthly bank lendingWeaker-than-expected inflation might lead to an interest rate cut later this year, added Reuters.

But a rate cut wouldn't fit with Beijing's firm commitment to economic rebalancing, argued some economists.

And they worry that even if the cost of borrowing is lowered, this won't necessarily be good news for the economy. The risk at this stage of the economic reform process was that easier lending conditions would result in more misallocation of capital to property-market speculators and inefficient state-owned enterprises, they added.

Just about everyone does seem to agree, however, that China will either see lower GDP growth in 2013 compared with last year, or growth around the same level  – a dramatic change in outlook since February.

Late last month, for example, the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) cut their China GDP growth forecasts for 2013 to 7.75% percent and 7.8% respectively.

Earlier in May, Bank of America-Merrill Lynch lowered its forecast to 7.6% from 8%

Standard Chartered has also cut its 2013 GDP growth estimate - to 7.7% from 8.3%.

China’s economy grew by 7.8% in 2012, which was the lowest increase in 13 years.

($1 = CNY 6.13)

Additional reporting by Chow Bee Lin

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By: John Richardson
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