INSIGHT: Can tighter China polyolefins help achieve sustained rebound

09 April 2014 14:00  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--CHINA’S polyolefins markets have tightened-up, thanks to lots of domestic turnarounds and overseas production issues. Hence, pricing edged-up last week for some grades.

This added to the earlier momentum generated by the start of the agricultural film-buying season and the end of post-Lunar New Year labour (LNY) shortages.

Hopefully, this is the turning point when volumes, too, will also recover after a disappointing post-LNY period.

Producer

Plant

Capacity (tonne/year)

Turnaround dates

Sinopec SABIC Tianjin Petrochemical

HDPE

300,000

7-17 May

Sinopec SABIC Tianjin Petrochemical

LLDPE

300,000

7-17 May

Sinopec SABIC Tianjin Petrochem

PP

450,000

7-17 May

PetroChina Dalian Petrochemical

PP

70,000

Shut down on 6 Nov 2013 with the restart planned for June 2013

PetroChina Dalian Petrochemical

PP

200,000

April-May

Yangzi Petrochemical

HDPE/LLDPE swing plant

200,000

15-30 April

Zhongyuan Petrochemical

LLDPE

260,000

5-12 May

Zhongyuan Petrochemical

PP

60,000

5-12 May

Zhongyuan Petrochemical

PP

100,000

30 days from 15 April

Guangzhou Petrochemical

LLDPE

200,000

26-31 March

Shanghai SECCO Petrochemical

HDPE

300,000

Shut from 11 March  for 45 days

Shanghai SECCO Petrochemical

LLDPE

300,000

From 11 March for 45 days

Shanghai SECCO Petrochemical

PP

250,000

From 7 March for 45 days

Jilin Petrchemical

HDPE

300,000

15 days from mid-April

Zhenhai Refining & Chemical

LLDPE

450,000

30 days from late May

Zhenhai Refining & Chemical

PP

500,000

30 days from late May

Source: ICIS China

ExxonMobil has also reduced its supply of linear low density polyethylene (LLDPE) and polypropylene (PP) from its facilities in Jurong Island, Singapore, because of an on-site shortage of feedstock propylene and ethylene, industry sources said on 3 April.

The unexpected shutdown of its 1m tonne/year cracker at the same site created a shortfall in its ethylene and propylene feedstock supply, according to sources. ExxonMobil declined to comment.

And Qatar’s Qatofin plans to shut its 450,000 tonne/year LLDPE plant in Mesaieed in mid-April for a turnaround, according to a source close to the company.

One can argue that, before these production shortfalls came along, slow markets were inevitable because of the big surge in shipments to China in January. Thus, it was only a question of time before things got back to normal.

For example, China saw its highest-ever monthly level of homo-polymer PP imports in January - 448,000 tonnes, according to the New York-based trade data service, International Trader Publications. PE shipments are also high.

But will tighter markets by themselves be enough to achieve a sustained rebound? That’s the $64,000 question.

A key part of answering this question will be working out how much “froth” was added to demand in 2008-2013 – and, thus, how much of the demand will now disappear because of the crackdown on speculation.

Equally important will be estimating the impact of a radically different credit environment on China’s small- and medium-sized enterprises (SMEs), which buy most of the polyolefins sold in the country.  

Historically, the SMEs have been fine despite the fact that they are the last in the queue for financing from the state-owned banks. China’s “official” lenders prioritise supplying loans to the state-owned enterprises (SOEs).

Back in 2009, lending from the state-run banks tripled as part of China’s giant economic stimulus package, which was aimed at mitigating the impact of the global financial crisis. Obviously, because of the scale of this increase, there was much more cake to go around - meaning that the SMEs were fine.

For much of the last three years, efforts have been made, with varying degrees of success, to control the growth of lending via the state-owned banks.

“For example, the China Beige Book, which surveys 2,000 firms across China every three months, said that the number of companies able to access bank credit declined every quarter for two years until the end of 2013,” wrote the Asian Wall Street Journal in a 3 April article.

But until the start of this year, the squeeze on official lending didn’t matter to the SMEs. The reason was that they were able to turn to the shadow-banking system for their financing. Interest rates via the shadow sector were often in excess of 10%, but this often didn’t matter because China’s economy was booming.

Now, though, as China tries to fix its hugely flawed economic growth model, it has gone after the shadow-banking sector, where problems have been building up for several years. In February, there was virtually no new loan growth via shadow banking compared with $160bn of growth in January.

As shadow bank lending contracted in February, credit from the state-owned banks rose by yuan (CNY) 24.5bn ($3.95bn) on a year-on-year basis.

This would still be fine if the credit transmission system had already been fixed to ensure that the SMEs, which are mainly privately owned, were receiving their fair share of credit from the state-run lenders.

But there is evidence that this is not the case. Preferential finance was still flowing to the SOEs because of the strength of their relationships with the banks, said several chemicals industry sources.

And Sydney University professor Dr John Lee has found little evidence of a winding back of the special opportunities and privileges in general, including soft loans, which have protected the SOEs from a genuinely competitive environment.

“It is clear that almost all of the so-called ‘reforms’ introduced tend to offer tactical fixes to the problems created by the dominance of SOEs rather than seeking to wind back or dilute SOE dominance in the Chinese economy itself,” he wrote in a 10 March article for the Australian investment news and analysis service, the Business Spectator.

But it is not just lack of reform of the credit transmission system that threatens the SOEs.

The state-owned banks don’t want to lend to the SMEs because they are worried that lots of these companies might go bust. This is because they are under pressure to keep their official non-performing loan ratios to around 1% of total lending.

Further, the official lenders are no longer able to as easily shift money off their balance sheets in order to speculate via the complex shadow-banking system. This money was eventually finding its way to the SMEs.

This is all part of Beijing’s plan. It wants to get rid of “low value” SMEs, including in the plastic processing sector, as it tries to move its manufacturing higher up the value chain in the developed provinces of China, tackle oversupply and bad debt and environmental problems.

The risk for the chemicals industry is that their customers will start going bust in ever-larger numbers as the reform process accelerates. Last week’s mini-stimulus package isn’t expected to alleviate this threat.

Complex and long supply chains mean there is no guarantee that only what China considers as bad companies will go under.

For example, you might be a multi-layer plastic film producer in China – exactly the kind of high-value converter the government likes. But what happens if you end up with a worthless IOU from one of your customers or suppliers? IOUs are growing in importance in China as lending dries up.

Unless the government “blinks” by relaxing credit controls, failures of both bad and good companies might occur.

But the danger is that if credit controls are relaxed, money might once again find its way to the bad companies

This is just one example of how genuine economic reforms and stable growth may be incompatible in China.

Additional reporting by Amy Yu and Jo Pitches.

($1= CNY6.20)


By: John Richardson
+65 6780 4359



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