By Malini Hariharan
If you are trying to find an explanation for the recent price movement in Asian polyolefin markets, a report in today's Wall Street Journal offers some clues.
China, says the report, has been eating into some of its reserves resulting in a decline in prices of commodities such as refined copper, iron ore and lead. This was reflected in the drop in imports of these products in April.
This is classic Chinese buying behaviour that extends to petrochemical markets- buy huge volumes to push up prices and then hold back purchases to drive prices down.
Analysts at Macquarie Securities noted after a field visit that some end-users of steel, such as auto makers and home appliance producers, are 'choosing to eat into their own inventory rather than continue to purchase' on the open market.
It is entirely possible that these auto makers and home appliance producers are following a similar strategy for purchase of polymers.
The blog had noted last week that China's polyolefin demand for January-April showed healthy growth. But, mirroring the trend seen in other commodities, imports were down in April.
Imports of high-density PE (hdPE) and polypropylene (PP) were down 23% and 15% respectively in April compared with the previous month.
However, Macquarie also believes that underlying demand for cars and refrigerators in China remains robust and that manufacturers soon will stop draining their stockpiles and return to the market.
This may take a while as Chinese manufacturing growth appears to have slowed down in May.
Pic Source: The China Post
The Purchasing Managers' Index (PMI) for the month was down 1.8 percentage points from April while the new orders index declined 4.5 percentage points.
The news dragged down stock markets but the FT reports that economists are not worried.
"The slowdown in the headline manufacturing PMI suggests that the overheating risk is likely to ease as tightening measures filter through. That said, we see robust economic growth without double-dip risks, not least because of massive infrastructure investment and resilient private consumption," said HSBC's chief economist for China
Economists also pointed out that PMI has fallen in May every year since the series was launched in 2005 and the decline should be seen as a seasonal phenomenon.