Place Your Bets – Who Is Right?

By John Richardson

DOW Chemical CEO Andrew Liveris said in a 27 July conference call that China’s industrial economy was still doing very well. “They’re managing themselves down very nicely,” he added, pointing to official GDP growth numbers of 8-9%, which translate into chemicals and plastics growth of 12-13%.

“We’re not seeing any issue here with polyethylene (PE) in terms of demand, especially our polyethylene, which is very much into applications such as agriculture, for example, and films and packaging in general, industrial packaging and the health and hygiene medical markets,” he said.

“We are seeing the demand growth, good volume growth and decent price power.”

In the article we linked to above, some of the other big, well-integrated and diversified chemicals companies also remain upbeat about the rest of this year. 

PE demand in China fell by 2.5% in the first half of this year, according to Paul Hodges.

A senior executive with a major polyolefins producer said: “You are not going to see very strong polyolefins demand growth in China this year – you are more likely to see negative growth. This is unless inflation falls below 4% which would allow Beijing to improve lending conditions.

“We might see some specific measures to help the small and medium-sized enterprises (SMEs). There is talk about the introduction of some kind of measures, but no details yet.

“I see buying by the converters and the traders staying hand-to-mouth and PE and polypropylene (PP) margins in Asia remaining under pressure for the less well-integrated Japanese and South Koreans.

“I think profitability has peaked in the US and Europe. Some grades of polyolefins are still too expensive in the West and need to come down more to reflect China prices, even taking into account the recovery in China over the last few weeks.”

The blog believes that the peak manufacturing season will be very bad (how can it be anything but bad?). We hear continued talk about tight polyolefin supply and this peak season justifying firm pricing. As far as demand goes, this can surely no longer be credible.

The next few weeks might see relief rallies in oil and stock markets which polyolefin traders holding long positions would use to justify a better outlook.

But this is a squash ball bouncing down the stairs – meaning, the overall trajectory is down with mini-peaks and troughs on the way as the global economy heads into a new recession.

And equity and oil markets could well react negatively to S&P’s decision to downgrade its US debt rating one notch to AA+ with a negative outlook attached. 

Higher interest rates. in response to the downgrade, are likely to weak consumer and business spending even further in the States and elsewhere.

BUT, we think the Chinese government might well be tempted to react with more economic stimulus, even at the risk of adding to inflationary pressures.

Controlling the cost of living could become less of an immediate priority than avoiding large-scale manufacturing job losses.

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