News focus: Asia petrochemical players wary of China credit issues

28 June 2013 09:49  [Source: ICB]

Concerns about China's liquidity situation and lower GDP growth rates are weighing on petrochemical players

Petrochemical players in Asia are keenly eyeing credit developments in China that can sway market sentiment and drive down product prices.

Concerns about a looming credit crisis in the world's second-largest economy heightened following the 24 June call by the People's Bank of China's (PBoC) on lenders to strengthen their control on credit growth, causing its stock market to tumble.

 There is concern about a possible credit crisis in China

China's central bank says that the current liquidity level in the financial system is "reasonable", and has not indicated an inclination to shore up money supply in the financial system. On 25 June, the Shanghai Stock Exchange Composite Index plunged by 93 points, or 4.7%, to 1,871 - its lowest in almost four years.

EXPANSION SLOWDOWN
A credit squeeze in China will ultimately lead to a further slowdown in its economic expansion, prompting major financial institutions to cut their GDP growth forecasts for the country.

China is the largest consumer of energy in the world and the number one importer of petrochemicals in Asia. A significant deceleration in its economic growth could have widespread repercussions on overall commodities trade.

Participants in the Indian polyolefins market are closely tracking developments in China, which is the key plastics market.

"If credit dries up in China, we will see panic in many parts of Asia, including India," said a Mumbai-based trader. If China stops buying, India will stop out of fear. Buyers will stay out of the PEPP [polyethylene, polypropylene] market if anything happens in China," the trader added.

The regional naphtha market continues to be beset by a supply glut, with India exporting 750,000-800,000 tonnes in July, and with close to 1m tonnes in deep-sea cargoes flowing into Asia in the same month, traders said.

OVERSUPPLY MAY EASE
The oversupply situation may ease, based on firmer downstream ethylene prices which will keep Asia crackers running at high rates, they said.

Still, the lacklustre manufacturing data in China weighed on the naphtha market.

"It is puzzling that the [ethylene] market is improving. Isn't the Chinese economy dying?" said a naphtha trader.

Ethylene prices in Asia rose by $10/tonne (€7.60/tonne) at the upper end of the range to $1,250-1,270/tonne CFR Northeast Asia on 24 June, as assessed by ICIS.

Ethylene prices were stronger mainly because of tighter spot cargo availabilities from Taiwan, market participants said.

Concerns about tightening liquidity in China prompted investment banks HSBC and Barclays to shave their GDP growth projections for China to 7.4%, according to media reports.

Singapore-based DBS Bank Research lowered its GDP forecast for China to 7.5% from 8.0%.

"We have revised down our forecast for GDP growth this year by another 0.5% and now expect 7.5% annual average growth in 2013," it said in a note on 25 June.

In the first quarter of this year, the Chinese economy grew by 7.7% - slower than the 7.9% rise recorded in the last three months of 2012.

SLOW GDP GROWTH
For the whole of last year, China's actual GDP growth, at 7.8%, was its slowest in 13 years, and the Chinese government is officially targeting a lower rate of expansion of 7.5% this year.

The latest data on China's manufacturing sector are far from encouraging.

The initial reading from HSBC on the country's purchasing managers' index (PMI) indicated contraction for June.

HSBC's flash China PMI at 48.3 was at a nine-month low, largely because of deterioration in external demand.

Any reading above 50 indicates expansion in the manufacturing economy, while anything under 50 indicates contraction.

"We believe recent PMI and interbank liquidity datapoints from China point to increasing macro uncertainties as authorities attempt to engineer a more sustainable, albeit slower, tempo of growth," said Singapore-based OCBC Research.

Additional reporting by Felicia Loo, Muhamad Fadhil and Viola Pan


By: Pearl Bantillo
+65 6780 4359



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