The Fear Factor Dominates



By John Richardson

EVERYWHERE you turn it is bad as fear over the future dominates the mood of polyolefin producers and buyers.

Aversion to risk seems to have increased because of the concern that this could be September 2008 all over again. Hand-to-mouth buying is the norm as no purchasing manager who values his or her job wants to be caught on the wrong side of a sudden collapse in crude-oil prices.

Last time around, when Lehman Bros went bust in September 2008 triggering the global financial crisis, governments came to the rescue through economic stimulus.

Markets were also buoyed by frequent technical problems at new Middle East plants during the 2009-2010 recovery. The great supply surge was always going to happen next month, then the month after that and so on and so on. Traders, supported by plenty of easy financing in China, were all-too happy to “help out” buyers who suddenly found themselves short of material.

Austerity is now a widespread policy in Europe with doubts over the extent to which the US will be able to overcome its political divisions and further boost its troubled economy.

Limited help for China’s struggling small -and medium-sized enterprises (SMEs) has been announced in certain areas of the country over the last two weeks. The central government has also indicated that it might introduce nationwide measures to help the credit-starved SMEs, which make up the bulk of China’s chemicals and polymer buyers – and which account for more than 50 per cent of economic output.

But the battle against inflation – the reason why credit conditions have got worse for the SMEs – looks very likely to stretch into next year. This would mean no great improvement in overall tight lending conditions that have badly dented China’s chemicals trade throughout 2011.

“We were all taken a bit by surprise by the August inflation number at 6.2%. We had expected it to fall to 5.9 %, but it looks as if underlying inflationary pressure is stronger than we thought,” said a sales and marketing executive with a major polyolefin producer.

“And so we don’t expect any positive changes in the liquidity situation in China this year and probably well into 2012.”

Beijing is struggling to deal with the harmful impact of its huge 2008 economic stimulus, which includes not only higher inflation but also a steep rise in non-performing loans due to over-investment real estate and other sectors, warn economists.

It cannot, therefore, risk a major relaxation in lending conditions – perhaps even if the global economy enters a new recession.

The government also seems to recognises that its investment-driven growth model is no longer sustainable for environmental reasons, hence the decision to end subsidies for auto purchases.

Since the subsidies were removed last December, auto sales have increased by just 5 per cent in January-July 2011. This compares with a 33 per cent increase for the full- year 2010.

“Polypropylene (PP) prices have come under a lot of downward pressure recently,” said a Shanghai based sales and marketing executive with a second major polyolefin producer.

“I think a big factor here has to be autos. We are seeing an erosion of premiums for co-polymer grades (used in auto production) over homo-polymers.”

High domestic polyethylene (PE) inventory levels, particularly in low-density PE (LDPE), have been weighing heavily on markets, he added.

Warehouses in Iran are also reported to be full of LDPE that is expected to put downward-pressure on prices in China, Europe and South Asia.

“I think LDPE, which had been tight for so long on very-limited global supply, became too-expensive and has suffered from demand destruction,” added this second sales and marketing executive.

As for the Middle East supply story, a chemicals analyst believes that many of the production problems that plagued new plants during 2009-2010 have been ironed out.

“Overall petrochemical exports from the port of Dammam in Saudi Arabia are up,” he said.

“We have also seen a substantial easing of a shorter-term tightness in PP as a result of less technical problems at three major Saudi plants.”

Some 1.5m tonne/year of capacity was affected by difficulties at the plants in July-August, including the 700,000 tonne/year Petro Rabigh facility, according to ICIS news.

Everywhere you turn markets look bad, as we said earlier.

Take Europe as the first example. “PE demand is weak and several producers acknowledge that the only way to bring the market into balance is by cutting production,” said the 16 September ICIS pricing European polyolefin report.

Turkey is a market worth monitoring because of its large domestic demand and low levels of production.

In tight markets this results in prices rising very quickly as exporters chase better returns than from domestic sales. But in weak markets the reverse happens as everyone fights for volume.

“European producers are selling at very competitive levels in Turkey followed by the Middle Eastern players who cannot place enough volumes in Asia,” said in an industry source in Turkey.

“Co-polymer PP has lost its usual Euros50/tonne premium over homo-polymer grades,” he added, which suggests that the problems in the China auto market might be crossing borders.

“The only optimistic point is that trader, distributor and converter inventories are not high. They are at, or are probably a little less, than usual levels.”

Another cause for optimism is the food packaging business in China which is booming, according to the first sales and marketing executive we quoted above.

However, he warned: “The reason is that people are eating-in more as they cut back on visits to restaurants. Fear about the future is even affecting the Chinese consumer.”

The mood in any market can rapidly change and perhaps such a change is just around the corner in polyolefins.

All that is needed is for Europe to resolve its sovereign debt crisis, the US to overcome its political paralysis and China to calm inflation and successfully redirect its economy away from an over-reliance on investment.

No problem then……

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