By John Richardson
THE statistics speak for themselves. For example:
*The full HSBC August manufacturing index for China, which was released last Friday, showed that manufacturing input costs were rising at their fastest rate for four months, suggesting that the battle against inflation is a long way from being won. Although the final HSBC purchasing manager’s index was revised up to 49.9 from an initial reading of 49.4 earlier in September, the index registered its lowest quarterly average since early 2009.
*Land auction failures surged 242% in the first seven months of this year because of government curbs on the property market and prices of new homes declined in 16 out of 70 cities last month compared with July, according to government data.
*Real-estate developers who have lost access to finance because of China’s credit clampdown are reportedly being forced to sell, creating a downward spiral in prices.
*China’s vehicle sales grew by only 3.3% in the first eight months of this year, according to the China Association of Automobile Manufacturers. For the full-year 2010, sales grew by around 30%.
*Some economists are talking of H2 2011 and first half 2012 GDP (gross domestic product) growth in the low single digits, possibly even as low as 5%.
A slowdown was perhaps inevitable following two years of stimulus-fuelled growth.
But the scale of the slowdown in some chemicals markets – as the central government continues to rein back liquidity in an effort to deal with inflation – is taking a lot of people by surprise.
“I just hope that the week-long national holidays (Oct 1-7) will bring some stability to the market and give people time to reflect,” said a Shanghai-based marketing manager with a major Asian polyolefins producer.
China’s polyethylene (PE) prices declined by an additional $20-50/tonne for the week ending 1 October, according to our colleagues at ICIS pricing.
PP was down by $60-70/tonne with a $70/tonne reduction in October offers for raffia grade pushing prices down to a nine-and-a-half-month low, added ICIS pricing.
Click here for graphs of the latest price assessments:
Restricted credit has, as we have said, been a major factor behind the price declines and the credit situation continues to deteriorate.
“We understand that lenders in Zhejiang province were told not to issue 60-90 day letters of credit to importers from 20-30 September,” added the Shanghai-based sales representative.
“It is all very opaque, which is not really helping the general atmosphere. We are not sure whether the restrictions will still apply once the October holidays are over.”
The letters of credit restriction in Zhejiang affected sentiment throughout China, as it is in Zhejiang where many of the big end-users and traders are located, he continued.
Such is the negative mood out there that no great comfort is being taken from very-big increases in polyolefin imports in August.
High-density polyethylene (HDPE) imports, for example, rose by 27% month-on-month and 10% year-on-year to 320,517 tonnes, according to China Customs. Low-density PE (LDPE) imports were up 43% month-on-month and a huge 113% year-on-year at 169,520 tonnes.
Explanations for the strong numbers include international traders liquidating inventory in bonded warehouses in China in order to minimise losses. The resin was bought when prices were a lot higher. Material is only registered as being imported once it leaves the bonded warehouses.
“I think some of the product we saw in the August numbers could have been sitting in the bonded warehouses for several months,” the sales representative added.
Further factors might be the inability to place volumes anywhere else, as demand in other markets such as Europe could well be worse than in China.
Saudi Arabian producers are also reported to be under pressure to place extra production of PP following the end of turnarounds and technical problems at three major plants.
The good news is that end-user inventory levels are said to be low, raising the possibility of a strong recovery in demand once the October holidays are over.
But despite international traders liquidating inventories their stock levels are still high, according to some market sources.
A strong demand recovery would require a dramatic change in sentiment – and more central and local government support for the hard-pressed small and medium-sized enterprises (SMES). The SMEs have suffered the most from the restrictions in credit which began late last year.
“What we need is a solid sign of improvement – an indication that the end-users are coming back to the markets in a big way,” added a Singapore-based polyolefins trader.
“If the biaxially oriented PP (BOPP) film buyers came back in a big way for example, that would be very positive news. A typical BOPP converter buys 2,000-3,000 tonnes.”
But even if the Chinese government did decide to relax lending restrictions, persistent macro-economic problems in Europe and the US might still weigh heavily on markets.
“Markets are so globalised these days that what is happening overseas is playing a bigger and bigger part,” added the sales representative with the Asian producer.
“The Dalian Commodities Exchange (which has a futures contract in Rmb-priced LLDPE) is a really important barometer of the overall mood.
The Dalian fell by around Rmb1,300/tonne during September to Rmb9,300-9,500. Physical prices have fallen in response, but not by quite as much.”
One shred of current comfort is reports of operating rate cuts at several South Korean crackers.
European cracker-to-PE producers have also lowered rates with further reductions expected, according to ICIS pricing.
It is, however, going to take a lot more than a few operating rate cuts to rescue what looks likely to be a very difficult fourth quarter in China.