Market intelligence: China polyolefins outlook brightens

04 October 2013 09:40  [Source: ICB]

Polyolefins demand is being pushed higher, and the fourth quarter could be even stronger as inventories are rebuilt. Yet concerns about the nature of China’s recovery linger

The increase in Asia spot ethylene prices to a near seven-month high, on the back of scheduled and unscheduled cracker shutdowns, seems to have arrived at a reasonably good time for Asia’s polyethylene (PE) industry.

If the high ethylene costs had happened up until around the end of May of this year, many producers might have been placed under more pressure, given the weakness in demand from converters in the key China market.

But much-stronger June-September PE demand growth than many people had expected has, to some extent, helped cushion the blow of the surge in feedstock costs. So have major production losses in low-density PE (LDPE), and perhaps, now, also high-density PE (HDPE).

But still, average Q3 integrated margins were 9% lower than Q2 for LDPE, but 55% lower for HDPE, according to the ICIS pricing Asia PE Margin Report.

The average September margin for LDPE was, however, the highest since June 2012.

Now people have started to worry about Q4.

“On the demand side, I do worry that converters in China have stocked up and might just start retreating from the market. I wouldn’t say their inventory levels are high, but they are certainly comfortable,” said a Singapore-based polyolefins trader.

But a source with a global PE producer expects the traditional volume push from producers in the fourth quarter, particularly those in the West as they attempt to reduce inventories ahead of year-end financial reporting. This could lead to processors in China seizing the opportunity to buy ahead of 2014 demand.

“Then we could see a pretty quiet January because of comfortable stock levels, and also because Chinese New Year is earlier in 2014 – 31 January. This year, the ­Chinese New Year fell on 10 February,” said the source.

Supplywise, the news seems mixed for the fourth quarter. For example, Saudi Polymers shut down its 1.1m tonne/year HDPE plant in Saudi Arabia for 10-13 days of unscheduled maintenance work on 22 September.

But PTT Global Chemical plans to restart its 300,000 tonne/year LDPE facility at Map Ta Phut in Thailand in mid-October. The plant has been off line since early July because of technical issues.

There have been very few global supply additions in LDPE over the past few years while demand growth has remained solid. The closure or restart of one plant might, therefore, have a significant influence on the market.

As always, the big information gap on future supply appears to be centred on Iran. Flows of LDPE, and of different grades of HDPE, to China – one of the few major markets left open to Iran because of sanctions – remain hard to forecast.

Returning to demand, there is another source of optimism for the fourth quarter: a surge in trading activity in not only PE, but also polypropylene (PP) and polyvinyl chloride (PVC). Not all traders might take the view of the trade quoted above.

Traders and end-users might build stocks in the fourth quarter because they anticipate further improvements in China’s industrial production and exports, think several analysts.

PE, PP and PVC seem to have been the star performers in China in 2013, at least in terms of apparent demand growth, (domestic production plus imports).

This is where the nagging doubts over the longer-term picture start to feed into the picture.

There was more cause for cheer on 23 September when the September HSBC/Markit China Flash Purchasing Managers’ Index was released.

The index had hit a six-month high of 51.2, up from a final reading of 50.1 in August. This was further above the key 50 mark that splits expansion from contraction. The final number at 50.2 came lower than the flash reading.

“The firmer footing was supported by simultaneous improvements of external and domestic demand conditions,” said Hongbin Qu, HSBC’s chief economist, China, and co-head of Asian Economic Research.

“We expect a more sustained recovery as the further filtering-through of fine-tuning measures should lift domestic demand. This will create more favourable conditions to push forward reforms, which should in turn boost mid- and long-term growth outlooks,” commented Qu.

But Barclays, in a research note, took a different view. “One of the bright spots for commodity markets recently has been a consistent pick-up in China’s import demand from the low point in Q2, when imports of almost all major commodities fell into negative territory,” wrote the bank.

“August was another strong month, showing a continued broad-based recovery that commenced in June and accelerated in July, with iron ore, copper, crude oil and soybeans imports all in positive year/on/year territory for three consecutive months.

“However, this growth is not the outcome of a successful transition towards the more consumption-led growth pattern that the government is targeting. Rather, it has been fuelled by a lurch back towards the familiar twin growth engines of construction and investment, as domestic private demand has failed to take off as a significant growth driver.

“As such, the recovery is likely to prove short-lived and our China economists recently revised down their 2014 growth forecasts to just 7.1% from 7.4%,” Barclays said.

Capital Economics, in its August China Activity Proxy report, agrees that China’s recovery is the wrong sort of recovery.

It says that the rebound is largely the result of more activity by state-owned enterprise, whereas business and leisure travel, property construction and freight volumes have all slowed.

Thus, it is with Barclays in thinking that when efforts to rebalance the economy are accelerated, another slowdown in growth is on the cards.

The big question remains, of course, when this is likely to happen.

“To be honest, assessing the prospects for Q4 is quite a bit easier than staring into next year’s crystal ball. I have never known such lack of clarity,” said a source with a second global PE producer.

Additional reporting from Peh Soo Hwee, Chow Bee Lin and Aamir Ashraf

By: John Richardson
+65 6780 4359

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