Market outlook: China's underlying polyethylene demand growth much lower than headline 14%

27 September 2013 10:27  [Source: ICB]

Back in May, some producers and traders were expecting China’s polyethylene (PE) demand growth to be flat or even negative in 2013.

And yet apparent demand (imports plus domestic production) increased by 14% in January-July over the same period in 2011, according to data from Global Trade Information Services and the Chinese government.

Board meeting Rex Features

Rex Features

But the big question remains: What is the extent of underlying real demand growth when adjustments have been made for inventory building?

“I think full-year actual demand growth will be around 6-7%,” said a source with a global PE producer. “This is a lot better than what I was expecting in May, but there has obviously been a fairly big amount of stock-building amongst traders and converters that will have to be discounted from the final growth number.”

A source with a second producer forecast that the final 2013 number could be as high as 8%, whereas a trader was considerably more pessimistic. He expected growth at just 4%.

Critical to the eventual outcome will be the availability of credit over the remainder of this year, seasonal factors and the extent to which food-safety concerns and rising income levels will continue to boost final demand for PE.

“The future availability of credit is incredibly difficult to assess. Every time you go to China you get a different impression,” said a second PE trader.

MINI-STIMULUS PACKAGE

“I think it’s very much work in progress for the Chinese government as they try to sort out the mess caused by excessive investment in infrastructure and industrial capacity. More mistakes might be made,” the trader said.

The “mistake” the trader was referring to was the late June decision by China’s central bank, the People’s Bank of China (PBOC), to send a warning shot across the bow of the “shadow-banking” sector.

The PBOC was taking aim at runaway financing by shadow banks, which consist of an assortment of leasing companies, pawnbrokers, trust companies and other informal lenders subject to limited oversight, said China’s official news agency, Xinhua, in late June.

The PBOC’s tool was to raise interbank lending rates without any warning. This made short-term trade financing expensive and hard to obtain. The result was a slump in industrial activity, including in all chemicals and polymers. This forced the PBOC to step in and inject extra liquidity into the financial system.

Since June, the reverse of what the Chinese government is trying to achieve over the long term seems to have happened.

A “mini-stimulus package” was launched by Chinese Prime Minister Li Keqiang, shortly after the June credit scare. It involves more spending on railways and tax breaks and other help for small and medium-sized enterprises. And in August, thanks to an apparent relaxation in overall lending conditions, “aggregate financing [lending via the shadow-banking system and formal lending from the state-owned banks] was Rmb1.57 trillion ($257bn), the central bank said, topping the median analyst estimate of Rmb950 billion,” according to a Bloomberg article on 10 September.

The surge in credit creation was widely reported to have largely caused by off-balance sheet lending by municipal authorities for funding infrastructure projects.

Extra credit, along with a strong recovery in exports, is also said to have benefited industrial production, which grew by 10.4% in August – a 17-month-high.

China PE

“Plastic film production has followed the trend in overall industrial production. In the first five months of this year it was quite weak, but has picked up quite significantly since June and was very high in August,” said a sales and marketing executive with a third global PE producer.

The problem is that the longer China takes to tackle overinvestment, the bigger the scale of the eventual financial shake-out.

“At the end of 2012, China’s credit-to-GDP ratio was 200% – 70 percentage points higher than in 2008,” said Charlene Chu, senior director in the Financial Institutions Group at Fitch Ratings, who is based in Beijing. “If you look at what happened in the UK or the US from 2002 to 2007, or in Japan in the late 1980s or in South Korea prior to their crisis in the late 1990s, the increases in their ratios were all roughly 40 to 50 percentage points.”

“From the end of 2008 until the end of 2013, China’s banking sector assets will have increased about $14 trillion. That’s the size of the entire US commercial banking sector.”

Some analysts, including those at Barclays Capital, do not expect any significant effort to rein in credit growth until next year.

It could also be that the increased availability of credit takes a while to fully work its way through into the economy. This might well offer further support to PE demand growth for the rest of this year.

However, the second PE trader said that some big announcement on new credit controls is expected during the November 
plenum, with implementation occurring immediately afterwards.

The plenum, a meeting of China’s top 200 legislators, is expected to set a new policy direction as China tries to rebalance its economy away from investment and towards greater domestic consumption.

“And, as we found out in June, mistakes can happen in credit policy and so this is likely to create a lot of caution amongst traders during the fourth quarter,” added the trader.

QUANTIFYING THE UNQUANTIFIABLE

The impact of seasonal factors on PE demand growth is far, far easier to quantify.

China’s peak manufacturing season takes place between July and the end of September. This is the time when its factories ramp-up production of finished goods for export to the West in time for Christmas, which, of course, boosts demand for PE and other polymers 
and chemicals.

In late August until around the end of September, demand for linear low-density PE (LLDPE) and low-density PE (LDPE) also increases, as this marks a peak sales-season for agricultural film.

But then it gets difficult again. One of the unexpected wild cards of 2013 is the surge in Chinese demand for pre-packaged food resulting from greater public awareness of food contamination scandals. Food packaging is, of course, often made from PE.

In July, Andrew Liveris, CEO of Dow Chemical, highlighted food scares as a reason for surprisingly strong growth in PE during the first half. These scares include rat meat being sold as lamb at some food stalls.

“Consumers are much more eager to buy pre-packaged food from supermarkets as they assume it is not going to be contaminated,” added the second PE trader.

And finally, the government’s ongoing effort to raise the wages of poorer citizens is also said to have delivered unexpectedly strong benefits to growth so far this year.

Hundreds of thousands are thought to have crossed the income threshold that enables them to afford Western-style consumer goods for the first time.

As yet, though, nobody seems to have been able to provide firm numbers as to the impact of these last two factors because of all 
the complexities.

For instance, in the case of rising anger over food contamination, data crunchers have found themselves staring into the unfamiliar territory of behavioural economics – i.e. how human psychology affects buying patterns.

Of great consolation, however, is that whatever this year’s final PE growth number ends up being, at least it is certain to be positive.


By: John Richardson
+65 6780 4359



AddThis Social Bookmark Button

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly