By John Richardson
ANYONE clinging on to the hope that the weakness in the global polyolefin market is merely down to China going through a prolonged period of destocking could face a rude awakening.
China's polyethylene (PE) demand was down 4% in January-May this year, at 7.1m tonnes, compared with the same period in 2010.
Imports fell by 12% to 3m tonnes as exports doubled to 240,000 tonnes.
The surge in exports was the result of re-exports by traders who had shipped to China, only to find they were unable to sell and had to therefore move the cargoes elsewhere.
European, North American and northeast Asian producers lost market share in China to the Middle East and higher local production, he said.
The drop in demand feels nothing short of shocking when measured against forecasts of full-year 2011 growth at close to or above 10%.
"This is not destocking, as we have been arguing since March," said a senior source with a global polyolefin producer. "This is a significant correction that the industry is going to have to get used to."
A US-based chemicals analyst said: "We keep being told [by Wall Street] that the inventory rundown process in China will end next week."
China was first supposed to rebound in May, then in early June, mid-June, end-June, early July and now late July, as we pointed out last week.
Higher interest rates and tightening credit in China - along with the bearish outlook for the global economy - have had a big effect.
The Federal Reserve added to US macroeconomic concerns last week when it revised down GDP growth expectations and raised unemployment forecasts.
Greece is a huge concern, not just for China but globally.
As The Economist magazine wrote in its 18 June issue, referring to the failure to resolve the Greek crisis: "Companies are currently sitting on piles of cash because they are wondering how strong economic growth will be.
"Politics gives them more reason to sit on their hands rather than investing and hiring immediately, providing a boost the world economy sorely needs."
A Greek debt default is widely viewed as inevitable, with the only question being the timing.
Economists have warned of consequences including insolvency of Greek banks, the re-launch of the drachma - and perhaps even the collapse of the euro as a whole due to widespread contagion.
Crude oil prices took an inevitable hit from the International Energy Agency's decision last Thursday to release 60m barrels of its reserves.
The declines were also attributed to greater macroeconomic pessimism.
"Buying forward" supported chemical and polymer pricing and volumes in general from the fourth quarter of 2010 until late February 2011.
Crude was on a bull run during that period, with confidence in China and the rest of the global economy very high.
Would any purchasing manager who values his or her career take the risk to stock-build in the current climate?
China led global polyolefin pricing upwards from the second quarter of 2009 until early 2011.
The country sucked in every spare plastic pellet, helping to keep US and European markets healthy - thanks to the biggest economic stimulus package in history.
Now China is suffering from a side effect of that package: inflation at well above Beijing's target rate of 4%, the observers added.
Prime Minister Wen Jiabao declared victory in the battle against inflation last Friday.
But it could take several more months, perhaps quarters, before any such victory is achieved.
Inflation, which was at a 34-month high of 5.5% in May, will rise to 6% in June, according to some economists.
And so further interest-rate rises and credit-tightening measures could well be on the cards.
This was the expectation in Asian polyolefin markets late last week, where prices continued to decline and buying interest remained depressed. PE prices were down by a further $20-80/tonne and polypropylene (PP) by another $20-70/tonne, according to ICIS pricing. Asian pricing has now been either flat or falling since the end of the Chinese New Year in late February.
China is again leading global pricing, but this time on the way down. Prices across all regions are slipping as they reflect what is happening in the world's most important market.
European low density polyethylene (LDPE) spot prices fell by Euros100/tonne last week, with linear low density polyethylene (LLDPE) and high density polyethylene (HDPE) also down.
Some moderate good news emerged earlier this week, however.
An initial European propylene contract price for July has settled at Euros1,130/tonne ($1,614/tonne), down Eurs75/tonne from June, a major producer said on Tuesday.
An initial European ethylene contract for July has been agreed at Euros1,090/tonne ($1,535/tonne), down Euro95/tonne, a major producer said on Monday.
More substantial decreases had been expected. We shall dig-around in an attempt to find out why the market held-up better than people had expected.
Spot offers for some grades of US PE emerged late last week that were 19% lower than May contract settlements. This was the result of falling feedstock costs and pressure from overseas imports.
Sell-side chemical analysts have remained persistently bullish in the face of the mounting negative news, the US-based chemicals analyst added.
Some chemical companies are also continuing to talk about recent setbacks being only temporary.
The longer that this goes on, the harder it will be to remain optimistic and to refer credibly to difficult market conditions as temporary.
If global GDP growth estimates keep on being revised down, what might this mean for the chemicals Supercycle theory?