Asian Inflation And Vietnam Polyolefins

Guess who’s coming to Christmas dinner


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By John Richardson

THE widespread problem of surging inflation in Asia ex-Japan is a major threat to petrochemicals demand growth in 2011.

Governments need to put the brakes on to prevent economies from overheating.

But the problem is that raising interest rates could cause even more hot money to flow into China, the Indian sub-continent and Southeast Asia as investors seek alternatives to feeble returns in the West.

China seems firmly set on a course of monetary tightening, as we discussed earlier this week, with further rate rises and increases in the bank-reserve requirement on the cards for 2011.

Indonesia, however, has so far refrained from raising the cost of borrowing, which has remained unchanged for 16 months, despite inflation hitting 6.3% in November.

The country’s central bank is instead thinking about re-introducing a cap on rupiah accounts held by foreigners.

But, according to this article in the Economist, the reluctance to raise borrowing costs at fast-enough rates has led to private credit growth of more than 20% a year in Bangladesh, India and Vietnam.

Shortcomings in economic policy have resulted in Moody’s Investors Service downgrading Vietnam’s sovereign debt. This could put more downward pressure on the dong which has lost one-fifth of its value against the US dollar since mid-2008.

The effect on the country’s polyolefins market is already very evident. Several traders have told the blog that their business over the last few months as all but ground to a halt.

“Nobody is buying anything because they are very worried about the economy and don’t want to be caught on the wrong side of another currency depreciation,” one of these traders, who is based in Singapore, told us.

Vietnamese polypropylene (PP) producer PetroVietman is apparently seeking to export resin, despite the country being in big PP deficit. This is presumably about earning valuable US dollars.

Such is the stagnant nature of the market that there are also reports of a trader re-exporting PP and polyethylene (PE) from Vietnam to China.

There are numerous other risks for petrochemicals in 2011, not least the strong possibility that in polyolefins and mono-ethylene glycol (MEG) new capacities will run better next year, leading to the long-awaited oversupply problem.

But inflation might turn out to be the 10,000lbs bad-tempered rhinoceros sitting in the corner of the proverbial room. No mother-in-law jokes, please.

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