The H2 Recovery Story



By John Richardson

THE majority of chemicals analysts have yet to wake up and smell the coffee, according to an industry observer.

“South Korean stocks have come off by 15-30% since their big recovery in January, but it is only the timing rather than the overall sentiment that has changed,” said the observer.

“The theory had been, and this is clearly not going to happen, that there would be strong restocking immediately after the Lunar New Year.

“Now the expectation is instead for a strong second half of the year. This sentiment, ironically, improved when the Q1 GDP number was released. Because this was the lowest growth that China had seen in nearly three years, everyone is assuming that more economic stimulus, through interest rate and bank-reserve requirement cuts, and more bank lending, is on the way.

“They have also interpreted the rise in March bank lending as an indication that more stimulus is already happening.

“But I think there is more downside yet, before any potential upside.

“If you look at a lot of the chemicals analysts, their earnings forecasts for a lot of the Northeast Asian stocks remain very bullish despite a disappointing first quarter and what seems likely to be a fairly weak Q2.

“The assumption among these analysts is that there will be a very strong pick-up in earnings during the second half that I just don’t see happening.

“All the upbeat earnings estimates for Northeast Asia are based on synthetic resins demand growth in China of 8-12 percent for 2012.

“But up until end-February, the latest figures I have, growth was only 3 percent. This was a slight improvement on the 2% growth in January-February 2011, but still a long way short.”

An indication of just how bad economic conditions have become came with the release of LG Chem’s first-quarter results yesterday.

The South Korean company reported a 42 percent decline in net income. Operating profit, or sales minus the cost of goods sold and administrative expenses, dropped 45 percent to Won459.5 billion The petrochemical division, which accounts for 78 percent of sales, had an operating profit of Won369 billion, half that of a year earlier.

LG, which is major acrylonitrile butadiene styrene (ABS) and polyvinyl chloride (PVC) producer, has been hurt by what’s happening in the China market.

The blog believes that some analysts, and companies, have yet to factor in the major structural changes taking place in the Chinese economy, which will dampen growth for the rest of this year at least.

There is also the political challenge, and the weakness of the export environment for manufactured goods.  

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