By John Richardson
A NEW report from HSBC supports our argument that China's synthetic resin market has yet to bottom out.
Big structural changes in China's economy are an additional factor, in our view, to the slowdown in China not covered in the comments below.
The bank highlights, of course, the weak business environment as a major factor behind the slowdown.
What is of more interest, however, is its analysis of inventory levels.
"Despite over a year of weak apparent consumption growth (production plus net imports), the cumulative levels of inventory within the system are well above their average of 1.5m tonnes over the last decade," said HSBC.
This was the result of the huge amount of stock that had been accumulated during 2009-2010, when China implemented a Yuan4trn ($628.93bn) stimulus package, along with an estimated Yuan9.6trn of new bank lending - equivalent to around one-third of the country's GDP (gross domestic product). This was designed to offset the impact of the global economic crisis.
"While it is amply clear that while there has indeed been a destocking cycle since Q1'11, the real key is the massive restock that occurred post Q4'08. This was driven, in our opinion, by the large stimulus undertaken by the Chinese government and the environment of cheap credit," added the bank.
"The data also illustrate the mini restocking cycle in Q1'12, which drove expectations around a demand bounce but was quickly followed by another round of destocking, which continues to date."
HSBC said that while converter inventories are low, this is the not case with the traders.
"While traders have been influential within the Asian resin markets for a while, we can trace the shift to a predominantly trader-led resin market in terms of influence back to the early days of the post-stimulus period in 2009," said HSBC.
"Key points to bear in mind are that the big departure of apparent consumption from GDP growth only started in 2009, post-stimulus.
"This correlates with the spike in futures volumes of linear-low density PE (LLDPE) on the Dalian Commodity Exchange and, anecdotally, with what one hears about Chinese traders using commodity imports as a source for financing.
"It also correlates with what we know of commodities where inventory data is readily available - for copper for example.
(The problem with the synthetic resins market in China is that there is no reliable measure of inventories).
"Furthermore, we are increasingly seeing large re-export offers from China of Saudi and other Middle Eastern product, which almost certainly implies large levels of trader inventory."
This all helps to explain a conundrum: Demand growth well below the increase in overall GDP.
Polyethylene (PE), polypropylene (PP), polyvinyl chloride (PVC), polyethylene terephthate (PET) and acrylontrile butadiene styrene (ABS) demand growth had averaged just 2.7% since the first quarter of last year, compared with a 9.1% increase in GDP, said HSBC.
Asian chemical share prices, despite steep declines over the last few months, are still overvalued by around 20 percent, said the bank. Some investors are, perhaps, still holding on to the Supercycle theory.
"Despite the weak business environment, the spread of stock ratings and earnings estimates are still highly skewed towards the bullish view," added the bank.
"We believe that consensus expectations are far too high, particularly in the case of the Northeast Asian names where year-on-year earnings growth in 2012 is likely to fall well short of expectations."