Have you ever been away on holiday and have cut yourself off from from work, only to return and find that nothing has changed?
So it seems in polyolefin markets. As this blog has been writing about for several months, the recovery in pricing seems to have been mainly feedstock-driven as this article from ICIS news points out.
Demand from converters in south China is reported to be weak; hardly surprising given the chart below from The Wall Street Journal which indicates that China’s economy is 36.5% dependent on exports with south China the heartland of China’s export sector.
No matter what the wisdom of the Chinese government’s huge fiscal stimulus aimed at boosting local demand, a sustained recovery in Western consumer spending remains crucial for China’s economic health over the next few years.
You have to doubt the wisdom of the stimulus packages because China could well be borrowing from the future to pay for growth today. And secondly, as we discussed earlier this week on this blog, the enormous increase in loan growth will put China’s banking system under pressure.
Chemical prices have risen in tandem with crude prices and with the broader sense of optimism – reflected in equity markets – that the worst of global economic crisis might be over.
True, the rate of declines in the real economy might have slowed down but as Mohamed El-Erian, chief executive and chief investment office of Pimco, argues in this Financial Times article “it is going to take time to restructure an economy (the US) that became over-dependent on finance and leverage. Meanwhile, companies will use this period to shed less productive workers.”
This could mean US unemployment will only peak at 10.5-11% and not until 2010. Yesterday saw the release of jobless figures for June which indicated a 467,000 drop in employment, raising the current jobless rate to 9.5% from 9.4%,.
I am sticking to my belief that a sharp correction in polyolefins pricing is likely very soon with markets set to get a dreal longer when the Asian turnaround peak season ends – and when new capacity comes online in China and the Middle East
Evidence of this is clear from the monthly ICIS Ethylene Worldwide Report, which was relaunched in May.
As this slide shows detailing China alone (and the picture looks equally disturbing for the rest of the world, also of course including the Middle East), available capacity is set to increase sharply as maintenance work tapers off and some of the new plants are commissioned.
But there might be more start-up delays and of course we don’t know the maintenance schedules for next year.
Clearly the risks are high, though, for any petrochemicals producer or buyer (I think what I’ve said for olefins and polyolefins applies to many other products) that has swung from the fear of Q4-Q1 last year to over-optimism.
If production or buying have been ramped up by too much and inventory levels have once again been badly managed, the risk of heavy losses from the bursting of this mini-price bubble remain high.
For the cautious and prudent company – and for the likes of Ineos and Dow Chemical that have taken opportunities to refinance during the current stockmarket boom - though, the prospects might not be that bad.
But for everyone, evidence of a real improvement based on stronger global consumer spending has yet to emerge.
Indeed, if El-Erian’s analysis is correct overall consumer spending on the things made from chemicals might get worse in H2 this year and throughout 2010.
And as foor beyond the end of next year, again, since I’ve been away nothing has really changed.
This comment from the economist Nouriel Roubini – although a bit dated as it’s from May – still rings true:
“We cannot rule out a double dip W-shaped recession with the wings of a tentative recovery of growth in 2010 at risk of being clipped towards the end of that year or in 2011 by a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies as concerns about medium term fiscal sustainability and about the risk that monetization of fiscal deficits will lead to inflationary pressures after two years of deflationary pressures.”