The Fragility Of the Recovery Story

By John Richardson



A VERY illuminating discussion with a Shanghai-located sales and marketing manager for a major Asian polyolefin producer reveals how the post- Lunar New Year “recovery” story being sold by the investment community is on even more shaky ground than we at first thought.

Three points worth highlighting, before we publish verbatim what he said, are:

*He believes that end-user inventories are not that low as Chinese converters acquired plenty of stock from distributors in December when it appeared that pricing had bottomed out.

*The modest price recovery over the last two weeks has been driven mainly by intra-trade deals rather than end-user restocking.

*Because of the weak export environment for manufactured goods made from imported polyolefins, this is now very much a domestic-led market. The reason is that the only substantial demand driver is for either imported or local material that goes into domestic final consumer applications. Sinopec is therefore calling even more of the pricing shots than usual – and, despite their margin squeeze leading to efforts to raise prices, overseas producers have very little pricing power. 

Here is what he said:

“Business is better compared with last year. Traders have picked up some additional cargoes compared with December, especially the second-tier domestic traders in China, because of the feeling that prices have bottomed out.

“In the case of homopolymer  polyrpopylene (PP), prices bottomed-out at $1,250 CFR China in mid-December and have since increased, through higher offers from the Middle East, to firstly $1,280-1,290/tonne CFR China and then $1,310/tonne CFR China.

International traders have subsequently tried to push prices a little higher – to $1,320 tonne CFR China or thereabouts – prompting some restocking by these second-tier local traders.

But there has been no great improvement in end-user buying. The end-users remain very cautious and, indeed, so do the traders who are doing only back-to-back deals and don’t want to hold cargoes for too long.

The traders are also willing to take modest profits, say $20/tonne, compared with the big profits available in 2009-2010 – the dream years.

The reason for this cautious, conservative approach is that many of the traders lost money last year because of a complete lack of visibility.

In terms of the number of weeks went prices went down, as opposed to up, it was the worst year for the China market in a decade. Some traders went bankrupt, as did end-users.

End-user inventories are not particularly low at the moment because local distributors liquidated stock in December in order to close their year-end accounts. This enabled the end-users to pick up cheap material when prices had reached a temporary bottom.

Most of the end-users seem to have enough material to last until the beginning of February, or even for as long as until mid-February, and so they are in no rush to buy.

But at least there has been a recovery of confidence among the traders, hence the increase in the intra-trade deals, based on this feeling that 2012 will be a difficult year, but not as bad as 2011.

Pricing has increasingly over the last few months been driven by what’s happening locally in China – i.e. domestic production for domestic final consumption, and imports which again are used for local final consumption. The reason is weak re-exports because of the problems in the West. This is not a producer-cost driven market at the moment.

Sinopec’s pricing policy has therefore become more important. Throughout last year they carefully managed inventories and this has continued into 2012. Small, conservative price increases have been announced by Sinopec since the mild improvement in sentiment.

I don’t think this year will be radically better than 2011 because the Chinese government cannot raise liquidity by too much, due to the risk of reigniting the inflation problem, but at least the expected further cuts in bank-reserve requirements offer some hope.

However, the external environment remains the big worry.

Producers need to be very cautious about their forecasts for 2012, and we have to work very hard to get closer to our customers. It is about understanding their needs and tailor-making what we have to offer.”

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