The View From Ground Level Is Different



By John Richardson

The macroeconomic headwinds are building, making it hard for some of those at the ground level in Asian polyolefin markets to foresee anything but fragile and tough trading conditions.

This is in marked contrast to the fairly optimistic outlook presented by some of the big, well-integrated and differentiated chemicals and polymer companies during the release of their second-quarter results.

Companies remained pretty confident about the second half of the year, even though they acknowledged problems in Q2 resulting from weaker growth in China, sovereign debt issues in the West and higher oil prices.

“I think the crunch time for the big, well-integrated companies won’t arrive until the third-quarter results season, as the momentum from earlier this year is still strong,” said a sales and marketing office with a major polyolefin producer.

For him pessimism abounds in China on weaker end-use markets for all sorts of chemicals and polymers, not just polyolefins.

The auto sector provides a good example, where sales in the second quarter of this year grew by just 2%. This compares with a 26% increase in the fourth quarter of 2010.

China’s Passenger Car Association believes that auto sales could actually decline this year, for the first time since 1992. This would be the result of tighter credit and the removal of one-off subsidies designed to boost sales following the 2008 global financial crisis.

The possibility of a downward correction in property prices is also a concern – although up until June real-estate values were reported to still be on the rise.

Twenty consecutive months of credit tightening, as the government battles against inflation, has led to large volumes of unsold homes.

Supply could be further lengthened by a big building programme to provide affordable homes for average and low-income earners.

Banks are reported to have stopped issuing new mortgages because of better returns from other types of lending.

Purchasing restrictions that had applied to big cities such as Beijing and Shanghai have now also been extended to the smaller cities, where house-price inflation has recently been higher.

“What I am seeing is some of my big customers buying polyethylene (PE) just to get their hands on the credit in order to complete real-estate projects,” added the sales and marketing executive with the polyolefin producer.

“They are in a hurry to complete these projects because of new government restrictions. If you don’t complete within a certain period of time, you have the land taken away from you.

“There is a lot of anxiety out there about the property market.”

The real-estate sector accounts for 12% of China’s GDP (gross domestic product), according to the International Monetary Fund.

Polyolefin prices continue to rise, though – in the case of PE by a further $10-50/tonne with polypropylene (PP) higher by $10-70/tonne for the week ending 29 July, according to ICIS pricing. This marked the fourth week in a row that prices had increased.

End-users in both Northeast and Southeast Asia (SEA) were also reported to have returned to the market in significant numbers as they stocked-up on anticipation of further price rises.

This was a step in the right direction as the price recovery had previously been mainly the result of traders taking long positions, said several market sources.

SEA processors are reported to be running flat-out to meet strong domestic demand growth.

“The Indonesian converters I know are working three shifts a day, seven days a week. The economy is growing well and people are becoming wealthier, driving a lot of substitution of natural materials for plastics,” said a Singapore-based polyolefin trader.

But the fragility of the demand from end-users in China – constrained by lack of credit and slower growth in consumer-goods sectors such as autos – remains a worry.

“My gut feeling is that if we push price rises too hard then the end-users will start to retreat,” said a sales and marketing executive with a second major polyolefin producer.

“We are being helped by tight supply, which should enable us to maintain recent gains until September or October. Beyond that, though, there is little visibility.”

Clouding the picture was the long-running political wrangle over raising the US debt ceiling.

The House of Representatives has approved a bill to raise the ceiling, involving a reduction in spending of about $1 trillion over the next decade. Now the Senate is expected to vote on the proposed legislation on Tuesday, US time. Both the Democrat and Republican parties expect it to pass successfully through the Senate.

Some financial analysts and economists believe that the US could still lose its triple-A debt rating, despite the debt deal.

A credit downgrade would drive-up interest rates globally.

“This debt debate is already further entrenching the pressured US consumer,” said a US-based chemicals analyst.

“Businesses aren’t hiring and consumers aren’t spending. The global economy is largely based around the developed world’s consumption of goods,” he added.

“Asia is seen as the growth market while the developed nations are the foundation.

“You take away more consumer spending, which would happen if there is a default or downgrade, and it is just a ripple-down to Asia.”

“Demand for Asian products would drop significantly from US consumers.”

This is crucial for polyolefins, and for all sorts of other chemicals and polymers, as we are now in the peak manufacturing season.

Between August and September, Chinese manufacturers of finished goods traditionally ramp-up production in order to export to the West in time for the Christmas sales season.

Buyers of polyolefins returned to the market last week to both hedge against possible further price increases, and to stock-up for the manufacturing season.

Even without any debt default or downgrade, a weak manufacturing season seems likely due to poor US GDP (gross domestic product) growth and high unemployment.

Container freight rates had fallen by 9.3 per cent since the end of April, said Bloomberg in a report last week.

Major shipping lines were reported to be delaying introducing peak season surcharges on the Asia-US route because of weaker demand from US retailers for finished goods.

“There are no safe havens for export-based converters these days. Demand is weak in the US, Japan and Europe because of all the macroeconomic problems,” added the Singapore-located polyolefin trader.

Those who buy and sell chemicals and polymers are inevitably focused on the short term, on the next deal.

So it is possible that they might miss the bigger picture.

But exactly how long does a short-term blip in growth have to last before it becomes a longer-term trend? Trading conditions in China have reportedly been weak since March this year.

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