By John Richardson
THE blog hears that some industry observers are persisting with the Supercycle theory for petrochemicals based on “decoupling” – i.e. emerging markets will compensate for any new recessions in the West.
We find this baffling as evidence points to a lost year of growth in China. The prospects for next year seem to us highly uncertain because of a host of factors which we will examine in detail over the coming weeks – including the objectives of the 12th Five-Year Plan (2012-2015). And, as we discussed on Monday, the struggle against inflation seems likely to extend into 2012.
Returning to 2011, several contacts have commented that they cannot understand how we keep talking about flat, or even negative, growth for polyethylene (PE) when GDP growth is still forecast to be a very-healthy 8-9 per cent.
This is the explanation we have been given by a Shanghai-based polyolefin industry executive:
“I think PE demand growth will be flat this year because so much stock was built up at the resin end of the business down to finished goods during the great credit flood.
“A lot more traders came into PE and into commodities generally, and started to speculate and take long positions during 2009-2010 when credit was easy.
“They were caught out in March/April when the market turned bearish and are still, as a result, sitting on high inventory levels.
“I think also that there must be a great many finished goods in storage because of the lack of consumer confidence. There is a real, tangible increased fear over the future and I see less consumer spending and more savings.”
Traders are suffering from a reduction in liquidity as a result of increased interest rates and bank-reserve requirements, we think. They have also been affected by an adjustment in how banks are required to calculate their reserve requirements.
So it seems likely to us that in this credit-starved environment with demand so uncertain since March/April, many traders have been forced to dump material on the market, thereby suppressing prices and reducing demand for new material. Numerous traders have reportedly gone bust.
Polypropylene (PP) looks a little better as demand will still grow by 4-5 per cent this year compared with 2010, added the industry executive.
PP demand has been badly dented by the removal in government subsidies for autos. The removal of subsidies is part of both the efforts to control inflation and a major strategic shift of economic direction under the 12th Five-Year–Plan. It therefore seems unlikely that they will be restored.
“For polyolefin operating rates to stand still – i.e. where they were last year – you would need the China market to grow at 6-8 per cent during 2011,” added a chemicals analyst.
“If the Supercycle theory were to come true you would need growth in China to be in the region of 10 per cent, which is clearly not going to happen this year.
“The West is almost certainly heading for recession. It must not be forgotten that the US and Europe still account for around 60 per cent of global polyolefins demand.”
“Flat or negative growth in the West for polyolefins seem possibilities, making it even harder to support the notion of a SuperCycle.’
Quite…….