By John Richardson
POLYETHYLENE (PE) inventory levels are thought to be so low at the converter end of the business in China that a case is being made for a strong recovery in demand and pricing post-Lunar New Year.
A further factor behind the anticipated rebound are forecasts of further credit easing by the Chinese government. For example, HSBC is predicting that bank-reserve requirements will be cut by 150 basis points in H1. Reserve requirements, the percentage of deposits against lending that the state-owned banks have to lodge with China's central bank, were reduced by 50 basis points late last year.
Investors in chemicals stocks are very confident of a post-New Year rebound in PE - and in some other petrochemicals on the basis of the same arguments, said a Middle East-based chemicals analyst.
"This means that, to a large extent, a big recovery in key petrochemical markets is already factored into share prices."
But does the argument hold up?
Downstream stock levels are low, according to the traders and producers we have spoken to over the last week.
Producers, however, have conceded that they are sitting on pretty-high inventories themselves, the result of persistently weak demand throughout Q4 and into early January, added the chemicals analyst.
"This is despite operating rate cuts. Northeast Asian crackers are currently running at 80-90 percent, including the South Koreans who rarely cut production."
And so the danger is that if prices were to begin to rebound after the New Year, the Northeast Asians might be tempted to rapidly deplete producer inventories and then raise operating rates in order to regain lost market share. This could bring the price recovery to a fairly swift halt.
The Northeast Asians struggled in the China market throughout 2011 as Middle East production at plants brought on-stream in 2009-2010 stabilised.
For example, Global Trade Information Services, the chemicals trade-data provider, estimates that PE shipments from Northeast Asia to China fell by 22 percent in January-September 2011 over the same period the previous year. Middle East shipments rose by 21 percent.
"In volume terms, high-density PE (HDPE) shipments from the Middle East to China were around 1.5m tonnes up until November last year. This compares with approximately 1.3m tonnes for the whole of 2010," said the chemicals analyst.
Middle East production is set to further increase in Q1 of this year.
This would put more pressure on the Northeast Asians as, of course, overall supply also lengthened.
Saudi Polymers is due to bring on-stream two 550,000 tonne/year high-density PE (HDPE) plants in Q1.
Qatar Petrochemical Co (QAPCO) is planning to bring its 300,000 tonne//year low-density PE (LDPE) unit on-stream in the first quarter of this year, delayed from Q4 2011, according to ICIS news.
Also weighing on buyers' minds, thereby perhaps making them more able to resist restocking, is the start-up of Saudi Kayan Petrochemical Co 300,000 tonne/year facility LDPE, which is due to occur in mid-2012.
"This could also enable Saudi Kayan to run its 400,000 tonne/year HDPE plant a little harder. It has only been running the plant at 50-60 percent in order to avoid surplus ethylene," the chemicals analyst added.
A further negative factor for supply - from a producer's perspective - is a much-reduced 2012 Asian turnaround schedule.
Around 16 crackers are scheduled for maintenance in 2012 compared with 33 crackers in 2011, again according to ICIS news
Based on the nameplate capacities of these crackers, ethylene production loss is estimated to be at around 865,534 tonnes, down by more than 50 percent over last year.
As for the strength of a Chinese demand recovery, driven by monetary loosening, a 150 basis point cut in reserve requirements during H1 would seem to be a big deal. The blog will do a little digging here to find out what the market believes would be the impact.
But as we have written before, Beijing looks set to pursue a "steady as she goes" economic policy, ahead of the November 2012 leadership transition.
European growth is also going to remain weak. As much as 45 percent of PE imports are re-exported as finished goods.