By John Richardson
The 6% decline in apparent polyethylene (PE) demand in China from January to April this year, compared with the same periods in 2011 and 2010, underlines what market participants have been telling the blog for many months.
The above chart also further emphasises how, in a weak market, the Middle East is gaining a bigger market share.
Its 33% increase in exports to China occurred as hard-pressed Northeast Asian (NEA) naphtha cracker operators saw their share of exports fall by 40%.
This was the result of:
*Increased Middle East production. What is worrying is that there is even more on the way.
*The ability of the Middle East, because of its tremendously strong feedstock-cost position, to cut prices sufficiently to meet the demands of China's struggling plastic converters. Meanwhile, of course, NEA competitors, confronted with high oil and therefore naphtha costs, have been unable to compete.
Further evidence of just how difficult life has become for China's small and medium-sized enterprises, which make up the majority of chemicals and polymers buyers, emerged late last week. Bloomberg reported that China's biggest banks may fall short of central government-directed lending targets for the first time in at least seven years. Last month, total bank lending declined by 33 percent compared with March, and May could be even worse.
The problem isn't the availability and cost of credit, but rather the unwillingness of businesses to borrow money. This suggests that unless business confidence improves, further reductions in the bank-reserve requirement and cuts in interest rates may not make much difference. Right now, it is hard to see how confidence can improve.
Interestingly, Southeast Asia, which is, of course, mainly a naphtha-cracker region, saw its PE exports increase by 16 percent. This is likely the result of the ASEAN-China Free Trade Area.
And very interestingly, North American Free Agreement (NAFTA) exports were down by a full 61 percent. To what extent was this the result of supply and demand being well-balanced in the US and Canada versus exceptionally weak markets in China? If the latter turns out to be the main factor behind the decline this just shows how bad conditions are, as NAFTA should on paper be in a very strong position because of very-low ethane costs.
Meanwhile, macroeconomic conditions just keep getting worse.
For example, real estate prices are now falling in more than half of China's top 70 urban areas. Fixed-asset investments have increased so far this year at their slowest pace since 2001.
The fall in fixed-asset investments supports our belief that major structural changes in China's economy are a significant drag on growth.
A Chinese cabinet adviser admitted, again late last week, that "a sharp slowdown in the economy" was taking place.
Asian PE prices were down by $10-60/tonne and polypropylene (PP) $20-50/tonne lower for the week ending 25 May, according to ICIS pricing.