Living In Hope Rather Than Expectation



By John Richardson

HOPEFUL theories espoused by traders can sometimes sound a little hollow – as was the case with the one doing the rounds in Asian polyolefin markets late last week.

“We think the latest interest rate rise in China will be the last this year and so, in a way, the announcement was good news. It means all the bad news is now out of the way,” a trader told the blog on Friday.

Several other traders agreed as they argued – perhaps because of the positions that they have taken – that the recovery  would hold.

When we raised the fact that many economists believe at least one more rate rise is on the cards this year, with further increases in bank reserve requirements possible and lending set to dip sharply in 2011 over last year, the phone line went dead in our discussion with the first trader mentioned above. We tried calling back but with no success.

China’s Premier Wen Jiabao thinks the 2011 annual inflation target of 4% or less will be hard to achieve. He might know a thing or two.

As long as the crucial 4% remains out of sight the lending environment will remain restricted – and could well get worse. This is a major problem for China’s small and medium-sized enterprises (SME), which make up most of the country’s chemicals and polymer buyers.

Interestingly, the exact opposite view on the impact of the latest interest rate increase was being expressed in the C2s market, according to our colleagues at ICIS pricing.

Ethylene prices rose by $20/tonne to $1,130-1,170/tonne FOB Korea last Friday.

But this and other gains were being “tempered by China’s interest rate hike and uncertainty if the hike in the key downstream polyethylene (PE) segment can be sustained,” wrote ICIS pricing in its Asian ethylene report.

Polyolefin traders are understandably sighing with relief that the market is finally showing signs of life after being flat or in decline since March. Import volumes and demand have been sharply lower.

The pricing improvement is significant: PE was assessed $10-80/tonne higher last Friday over the previous week with polypropylene (PP) increasing by $10-60/tonne, according to ICIS pricing.

But another producer we talked to this morning, confirming the views of the producer we spoke to last Thursday when we broke the news about the price rally, warned that it was important to put the recovery in the right context.

“There has been some improvement in demand, but that was to be anticipated,” he said.

“We are about to enter the peak manufacturing season for exporting finished goods to the West for Christmas. The next agricultural film season is also about to begin in August.

“Maintenance shutdowns are the other factor but crucially, where do we stand now in terms of demand compared with this time last year? Down is the answer.”

In a report released late last month, HSBC talked about consensus demand-growth forecasts for PE, PP and polyvinyl chloride (PCVC) in China being in the range of 11-13% for 2011. No way is this going to happen.

Tomorrow we will look at similar widespread caution among European producers. Despite recoveries in olefin and polyolefin spot markets, further reductions in contract prices are still being very-seriously discussed.

On the Asian supply side, a US-based chemicals analyst told us that the peak production loss for 2011 was forecast to be in February-March this year.

After the steep rise in cracker turnarounds in August, he sees supply being well-balanced in the fourth quarter.

And sorry to bore you to death about this, but we are still searching for an answer to our question of whether the Saudis, and also the Kuwaitis, have upped production on greater availability of associated gas.

Could this extra supply make the market long in the last quarter of this year?

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