By John Richardson
The muddle and confusion that has characterises forecasts for Chinese chemicals demand continues - and with all this persistent uncertainty comes a great deal of nervousness about volumes in the second half of 2010.
So far so good for this year, despite a 43% drop in bank lending during Q1 2010 compared with the same period last year. You would have thought this would have taken the heat out of import volumes.
But March saw record imports for linear-low density polyethylene (LLDPE), low-density polyethylene (LDPE) and monoethylene glycol (MEG).
These strong shipments could - as we discussed last week - be the result of the lag effect of cargoes that had arrived in China earlier on, but had not been recorded by China Customs, as until last month they were sitting in bonded warehouses.
Speculative purchases of overseas cargoes surged in November-January, meaning that a substantial portion of the healthy March numbers might represent an historic period of much-greater confidence in China's near-term economic prospects.
Since November-January, local banks' reserve requirements have been raised several times and regulations on mortgages toughened-up to make property speculation a lot harder - a long with the deep cuts in bank lending.
But what if, as again we talked about last week, there is so much excess liquidity in the Chinese economy that all the steps taken to date to cool the economy down don't work?
In the short term, this might be good news for chemicals demand as asset bubbles may continue to inflate, creating similar growth numbers to those of last year.
The potential downside of when the bubble eventually bursts is obviously much greater, though, the longer asset-price inflation continues.
Something has to be done that effectively cools-down a property market where affordability is now way out of reach of most people living in the big cities. Average salaries in Shanghai are $5,000 per annum whereas a typical condo these days costs $200,000, according to fellow blogger Paul Hodges.
If the financial results of the chemicals companies continue to reveal astounding performances from China (Dow Chemical's Q1 Greater China sales were up by 46%, for example!), it's well worth asking searching questions about the potential for demand to suddenly fall-off a very high cliff.
It is also worth asking whether companies are making measurements of the quality as well as the quantity of a sale.
Sales and marketing departments don't tend to care too much where volumes are going, provided they are being shifted.
But "the once it's out of the factory gate we don't care" approach is dangerous if your job depends on making forecasts.
And forecasting remains a nightmare because of the impossibility of getting any reliable estimates of inventory levels in China.
It is not just the levels that matter, but who is holding what stocks - as the March import data confirms.
"You need to have an understanding of what's in bonded warehouses and domestic storage - plus knowledge of how high inventory levels are with different types of traders," said a Singapore-based polymers trader.
""By that I mean, how much products are in storage in any given month is with regular and established traders as opposed to the new entrants."
New entrants are more likely to indulge in the complex multi-commodity trades we have discussed before, and have greatly increased in number since China launched is big economic stimulus package, he added.
These trades can involve a sudden dumping of chemicals or plastics cargoes below cost because money has been at another point in one of these complex trades - through, for example, selling copper, zinc, aluminium or even a condo.
In other words, a deep understanding of inventories would enable exporters to begin to get a feel for real versus apparent demand.