By John Richardson
CHINA'S polyethylene (PE) market is in such a bad state that re-exports are now being considered to Europe.
The wide disparity between a flat China market and strong pricing in European has created this exceptionally rare arbitrage opportunity, which, according to an industry observer "has happened before, many moons ago, but not on this scale."
Click here for a slide showing an example of this disparity -
Traders left with too much material on their hands have been re-exporting resin for several weeks now to other destinations such as Vietnam, Turkey and Latin American.
What is remarkable, and worrying, is that PE in China has remained flat despite surging raw-material costs on the high price of crude.
So what's going on?
We have already written about the reduction in available credit, a particular problem for small -and medium-sized enterprises, as a result of increased bank-reserve requirements.
Reduced liquidity must have surely also hurt the levels of speculation among traders that has helped pump up the market over the last couple of years.
Two producers, however, argue that while official credit growth had slowed down, off balance sheet lending made the real total of available financing a great deal higher.
Fitch, the credit ratings agency, has said that banks have shifted money off their books through, for example, packaging loans into securitised products. This has allowed them to sustain high levels of lending.
These kind of practices resulted in Rmb11 trillion of new loans in 2009, way ahead of the official figure of Rmb7.9 trillion, according to Fitch.
"The flat China market is more likely to be the result of a general lack of confidence in future lending conditions," said one of the producers.
"Tougher restrictions on property speculation and the end of tax incentives for auto purchases are other factors."
If the government continues to struggle to control inflation for the rest of this year and into 2012, more measures might have to be taken to cool the economy down.
China's Premier Wen Jiabao also recently said: "China will resolutely press ahead with controls on the property market to curb speculation".
He added that the government will "'severely punish" irregularities in the real-estate market, implement differentiated credit and tax policies, and hold local officials accountable for maintaining stable home prices".
Demand in Japan has, of course, also been hit by the earthquake and tsunami.
And here is something else to worry about: Crude oil production in Saudi Arabia has risen to 9.4m barrels a day from 8.4m barrels a day as part of OPEC's efforts to calm troubled markets, said an industry observer.
This could well be turned into more PE for shipment to China, further depleting the market share of the higher cost producers.
OPEC only officially abandonded quotas ten days ago and so it might take a while longer before we see these extra volumes. But given that Saudi Arabia can make money in any market conditions they will run surely run harder once they receive the extra feedstock.