China petchems shrug off $586bn stimulus

10 November 2008 05:50  [Source: ICIS news]

By Bohan Loh

 

SINGAPORE (ICIS news)--China’s petrochemical industry provided a cool response to the government’s massive Yuan (CNY) 4,000bn ($585.65bn) economic stimulus package meant to spur domestic consumption, sources said on Monday.

 

The package, meant to last through to 2010, will finance projects in areas such as low-income housing, rural infrastructure, transportation, the environment and includes CNY 100bn, from current-year’s funds, and another CNY 20bn that has been brought forward from next year’s budget for post-disaster reconstruction efforts.

 

Few details about the package could be forthcoming, leading to a cautious response from the petrochemical markets still reeling from massive losses.

 

“I am still not quite confident of the adequacy of this stimulus package. Demand fundamentals remain weak despite the “sudden rush” into the polyvinyl chloride (PVC) import market,” said a Shanghai-based PVC trader

 

He explained that the sudden surge in the number of deals done was due to the entry of speculative trade on the opening of a price spread between domestic materials and imported cargoes.

 

“I think this [economic package] is going to spur some trading interest, but it will not support demand in the short-term,” said a Beijing-based styrene monomer (SM) trader adding that factory closures and unemployment rates were still on the rise.

 

Domestic consumption of SM for October fell nearly 10% month-on-month to 356,600 tonnes from 395,200 tonnes in September and is expected to register another 6% month-on-month drop for November, according to the China Petroleum and Chemical Industry Association (CPCIA).

 

“Demand for SM and downstream derivatives is not going to come back immediately just because of government funding,” he added explaining that the fourth-quarter is the traditional lull for styrenics demand from the constructive sector on colder weather setting into the region.

 

“It is just like 1998. The stimulus package will take time to filter down into the economy,” said another Shanghai-based olefins trader referring to a similar fiscal package which helped stave off the Asian financial crisis ten years ago. He added that with the drastic fall in exports of manufactured goods, the government needed to boost domestic economy by building infrastructure projects.

 

“The building of railways will need steel, cement and plastics,” he said, but added that current demand for polypropylene (PP) was still soft due to the short term oversupply situation.

 

Overseas industry counterparts also concurred the time-lag expected before witnessing the direct impact on demand levels.

 

“The spending power of ordinary people needs to be improved before demand for key polymer applications such as automobiles and food packaging could pick up,” a South Korean polyethylene (PE) producer said.

 

Other sources expressed doubts in the government’s commitment to implementing the announced fiscal policy as an earlier government plan to subsidise rural households on refrigerator purchases was put on the back burner after the Sichuan earthquake in May.

 

“The government had to divert resources for rebuilding the disaster hit areas,” one polymeric MDI trader said. Polymeric MDI is used as an insulation agent in refrigerators.

 

In conjunction with the stimulus package, China will also reform its value-added tax system, which would cut industry costs by CNY 120bn, according to state media, Xinhua.

 

With additional reporting by Steve Tan, Chow Bee Lin, Lynn Du and Keny Jin.

 

($1 = CNY 6.83)

 

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Author: Bohan Loh
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