China Auto Market Provides Clear Evidence
By John Richardson
DESTOCKING is obviously not the main driver of the decline in China's polyolefins market, despite what a dwindling band of optimists are still arguing.
The glaringly transparent reason for the fallacy of the fading belief is a decline in key end-use markets for polyoleifins - and for other polymers and chemicals.
Today we are going to look at autos and next week the housing sector, which, according to some estimates, accounts for 50% of China's GDP.
The auto industry is a very important consumer of chemicals globally, accounting for 10-15% of the industry's revenues, according to a report released by HSBC last week. $2,800 of chemistry goes into each auto manufactured in the US, estimates the American Chemistry Council.
Polymers used in autos include a large amount of polypropylene (PP), high-density polyethylene (HDPE) for fuel tanks, polyurethanes (PU), nylon resins, polycarbonate and acrylonitrile butadiene styrene (ABS).
China is now the largest auto market by production in the world and so its continued health matters a great deal for the global chemicals industry.
Auto sales have fallen as a result of government policy changes.
The battle against inflation is likely to continue for the next few quarters at least and so it seems unlikely that overall credit conditions will be eased.
Bank-reserve requirements and interest rates wil more probably be further increased as the government tries to bring inflation rate below its 2011 full-year target of 4%.
Incentives that were specifically introduced to boost auto sales have also been rolled-back.
The hope is that some of these incentives might be re-instated. But how likely is this given the contribution that booming sales have made to overall economic overheating - and to chronic traffic-congestion problems?
Sales grew by a staggering 32% last year to 18.06m vehicles.
April this year saw a monthly decline for the first time since 2009 and May sales also dipped - by 3.98% to 1.38m units.
Full-year 2011 sales growth estimates are, as a result, being revised down. The Chinese Association of Automobile Manufacturers (CAAM), for example, now expects growth to be below the increase in GDP (expected to be around 9%) compared with its previous prediction of a 10-15% expansion.
Light-vehicle sales could actually decline by 10% in 2011, according to Rao Da of the China Passenger Car Association and Zhao Hang - president of the China Automotive Technology and Research Centre.
The outlook has become much bleaker, adds the HSBC report, as a result of:
*The reinstatement of a 10% purchase tax on cars with an engine size of 1.6 litres or smaller from December last year. The tax was cut to 5% in January 2009 and then raised to 7.5% before being returned to the full 10%
*The removal of one-off subsidies for trading-in old, and therefore highly-polluting, cars in rural areas
*Beijing cutting the issuing of new licenses in 2011 to one-third of last year's level in order to tackle congestion. Only 240,000 new licenses will be issued this year. While Beijing only accounted for 7% (800,000) of nationwide auto sales in 2010, the concern is that the other major cities will follow suit, such as Nanjing, Chengdu and Guangzhou.
The one remaining incentive - a Rmb3,000 incentive for each fuel-efficient car that is purchased - might soon be brought to an end, says HSBC.
Share prices of local auto companies rallied last week on a local media report that the National Development and Reform Commission was set to ask the State Council to re-instate incentives. However, the CAAM denied the report.
The auto sector perfectly illustrates how Beijing faces the very-difficult balancing act of trying to cool the economy down while avoiding an economic hard-landing.
And the 32% growth in 2010 auto sales raises another important point: How many chemicals companies paused for thought when they saw this number, realised it could not possibly be sustainable and planned for lower growth - or even a contraction in the market?
The widespread panic and surprise over, along with denial, over a weaker China suggests the answer is probably "Not many".