Asian Chemical Connections

 By John Richardson

GROUND level economic conditions in China are still a lot weaker than headline GDP (gross domestic product) numbers suggest.

For example, a polyvinyl chloride (PVC) sales and marketing executive said: "PVC demand growth is going to be in minus territory this year. Carbide-based producers are likely to continue to have to run their plants at operating rates below 60 percent."

And in polyethylene (PE), as the chart above illustrates, demand in the first half of this year was down 1 percent (red column) versus H1 2011 (green) and down 3 percent versus H1 2010 (blue).

Imports were also down 9 percent and exports up 82 percent versus 2010.

This is from data provided by Global Trade Information Services.

A Zhejiang provincial government report, which fellow blogger Paul Hodges referred to in this post yesterday, neatly summarised some of the ground level economic problems we have been discussing all year.

"Weak demand, rising labour costs and strained liquidity are ravaging enterprises in East China's Zhejiang province, a traditional stronghold of China's entrepreneurship," said the report.

Synthetic resin demand is no longer expanding in line with that of overall GDP because:

*Small and medium-sized companies, as the Zhejiang report underlines, continue to struggle with lack of credit, have been badly hurt by the slowdown in exports and are more exposed to higher labour costs than the state-owned enterprises. The SMEs make up the bulk of China's polymer and chemicals buyers.

*Inventories of synthetic resins remain high because of the economic distortions left over from the 2009-2010 economic stimulus.

Commodity markets in general, including chemicals, may well take cheer from a recovery in GDP growth during the second half of this year.

But the chemicals sector would need to ask itself two questions when assessing the value of a rebound in growth, which are:

1.) How much of the new stimulus has found its way through to the SMEs, given that a lot of the stimulus will go to big infrastructure projects executed by the larger companies?

2.) Will this type of investment-led growth be good for the economy in the longer term? China already faces major bad-debt problems and needs to wean itself off investments as the main driver of growth.

By John Richardson

ADIDAS recently announced that it is to close its only directly-owned sportwear factory in China.

Many other similar factories could shut if Beijing sticks to its 12th Five-Year-Plan (2011-2015) promise to move up the industrial value chain.

The Adidas decision is driven by rising labour costs, which are partly government policy designed to boost domestic consumption and narrow the gap between the rich and poor. Another big factor behind higher wages has been inflation.

"All we are talking about here, in cases such as Adidas, is the relocation of fibre intermediates and polyester demand from one country to another," said a source with a major Asian mono-ethylene glycol (MEG) producer.

"China's loss is Bangladesh's, Vietnam's, Indonesia's or Pakistan's gain as outsourcing operations shift to these lower-cost operations," he added.

"Chemicals companies need more diversified sales and marketing strategies, including more people on the ground in countries such as Bangladesh and Vietnam in order to understand their markets."

The transition will not be smooth, however, as this article from Business Insider, quoting the China Hearsay blog, indicates.

"The acceleration of plant closures in some sectors, like textiles, will mean lots of unemployed folks," writes the author.

"The government will have to deal with the resulting disputes between labour and management, involving things like back pay, social insurance payments, etc.

"But I can't help thinking about entrenched industries and political power. Maybe I'm simply looking at this like a Westerner, but when you have an industrial sector in decline that has sufficient juice with a government, what usually happens? Well, where I'm from, it ends in recriminations and protectionism."

The Adidas story is a case in point, as the Western retailer's former manufacturers in China are planning legal action in an effort to win compensation.

And as the economy weakens, and we worry that there is every chance it will become a lot weaker, Beijing may well be tempted to backtrack on economic reforms.

In the long term, this will not bode well for China's economic health as it attempts to escape the "middle income" trap.

More immediately, how do you plan a chemicals and sales strategy when there is such a high degree of uncertainty over the rate at which demand will migrate to lower-cost countries?

Evidence of the pressure on Beijing to protect jobs came with yesterday's release of two China purchasing manager's indices for July.

Reuters, in a report on the disappointing July indices, (see above chart) said that there was anecdotal evidence of increased job shedding and company downsizing as new manufacturing orders fell.

"Larger firms, which tend to be less sensitive to short-term market movements than their smaller counterparts, are under pressure from rising inventories," added the newswire.

"The debt-laden steel sector is lobbying for export rebates to offset a domestic supply glut and plunging profits, the China Iron and Steel Association said on Tuesday."

By John Richardson

SOME 10-15m tonne/year of coal-to-olefins (CTO) capacity in China is being considered, has already received approval or is in the planning stage, according to a report by Woori.

"Major coal companies, petrochemical companies and foreign petrochemical players are all known to be planning CTO plant construction in China's north western regions," says the South Korea-headquartered bank.

"Assuming that it takes 3-5 years to build these plants and run test operations, most of these new facilities are expected to start shipping out product (from) around 2014."

China's CTO industry is cost competitive with imports provided oil prices are above $80/bbl, according to the China Petroleum & Chemical Industry Association.

In the past it was argued that high logistics costs posed a threat to CTO economics. As the industry is located in northwest China, close to the country's big coal reserves, it is a long way from the major olefin derivative consumption markets in southern and eastern China.

But industry consultants now argue that improving rail links mean that logistics are no longer a major drawback.

And the coal companies behind some these projects see much greater value in making polymers downstream of CTO production than just selling coal. Coal often trades at around $100/tonne, whereas polyethylene (PE) and polypropylene (PP) prices are usually in excess of $1,000/tonne.

At the moment, there are quality issues relating to PE and PP made via the CTO process.

However, once technical problems are resolved via the development of highly efficient catalysts and improved facility stability, PP supply via CTO should have a significant effect on supply and demand from around 2014, believes Woori.

PE supply and demand will also be influenced by the CTO industry from 2014, but only in low-value end-use applications, adds the bank.

CTO expansions are part of China's plan to raise ethylene equivalent self-sufficiency to 64 percent by 2015 from 48 percent in 2010.

Its target for propylene self-sufficiency is 77 percent by 2015 from 63 percent in 2010.

This should give overseas project proponents pause for thought.

So should concerns that China's economy could face lower GDP growth over the next decade as it makes the painful adjustment from investment-driven to domestic-driven growth.

US PE producers are already finding it harder to export to China. In the first half of this year North American Free Trade Agreement (NAFTA) shipments to China were down by 59 percent over H1 2010, according to Global Trade Information Services.

How will the US sell greater volumes of PE exports, once shale gas-driven expansions come on-stream, in a China market increasingly dominated by local production?

The US industry might well argue that if CTO-derived PE continues to only penetrate low value end-use markets, they have a technology edge.

How big will higher-value China PE markets become, though?

By John Richardson

POLYMER markets continue to tell us that China's 2009-2010 economic stimulus programme delivered unsustainable demand growth.

China's demand for polyvinyl chloride (PVC) surged from 10.9m tonnes in 2009 to 13.2m tonnes in 2010, according to Global Trade Information Services (GTIS). 

Demand then reached 14.1m tonnes in 2011. The slowdown in growth reflected government efforts to deal with the economic damage caused by the stimulus package.

Now, as the chart above indicates, which was compiled from GTIS data, imports are on the decline.

Domestic plants are also running at operating rates of below 60 percent, said a source with a major Asian producer. This further suggests that demand growth in 2012 will be in the low single digits, or possibly even in minus territory.

Reasons include the weak external environment and structural changes in China's economy which, of course, are also affecting many of the country's other chemicals and polymer markets.

The blog has received several emails over the last few days from polymer industry executives asking whether a recovery can be expected over the next few months.

In the case of PVC, a rebound in infrastructure spending might deliver some benefits. But there is a big risk that this spending will do more harm than good to the economy in the long run.

Infrastructure spending includes plans to build 36m affordable homes during the 12th Five-Year-Plan (2011-2015).

In the first five months of this year, China invested $61.66bn on 2.06 million affordable homes with plans to start construction on at least 7m by the end of this year, according to the Ministry of Housing and Urban-Rural Development.

But it has emerged that demand for these homes is poor because they are being built in the middle of nowhere. The reason is that the best-located plots of land are being auctioned-off to private developers by local authorities eager to make lots of cynical money.

The blog wonders, therefore, whether the pace of building might have slowed down in response to weak demand. Or could it be that the pace of construction has been maintained, further adding to China's surplus housing stock?

Another cause for PVC cheer might be the biggest gain in private home prices in more than year in June. This has led to claims that the housing market has reached a positive turning point.

But if house prices really took off again, possibly prompting yet more speculative building, it seems likely that Beijing would toughen-up regulations. Last month, China's Premier Wen Jiabao said China would "unswervingly" implement property controls in order to prevent home prices from rebounding.

The problem for the central government is that existing property prices are already way beyond the pockets of the vast majority of Chinese.

Has the housing market really turned the corner, though? Probably not, says Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management in Beijing.

"There is genuine growth in demand for housing - as well as office and commercial space - in China, but there is also evidence that both developers and investors have gotten ahead of the market," wrote Chovanec in a post on his blog.

"Developers have built up large stocks of unsold inventories that they are now under great pressure to liquidate in order to pay mounting debts.

"The capacity and willingness of Chinese investors to front for future demand may be reaching its limits.

"All of this raises the real possibility that people who are buying into the latest rally, in the belief that prices can't fall any further, may be misjudging the market, and the rebound we are seeing may be a classic 'dead cat bounce'."

A telling statistic from the same blog post, underlining Chovanec's point about the future capacity of investors, is that Chinese households own an average of 1.2 homes. This implies that one-third of all home-owning Chinese have invested in a second property.

These statistics help to explain why PVC demand grew by 2.3m tonnes in 2009-2010, and why that growth was unsustainable.

By John Richardson

THE consensus view is that China's economy bottomed out in H1 and will see a recovery in GDP growth during the second half.

Much hope has been attached to more government stimulus delivering a short-term boost to growth, even if there are concerns over the long-term damage that further investment-driven GDP could cause.

But will the polymer industry benefit from this recovery, given that inventories continue to clog-up the system? We think not.

Some very revealing comments from a senior industry executive also point to how small and medium-sized enterprises (SMEs) in China continue to struggle. The SMEs make up the bulk of the country's resin buyers.

Industrial production as a whole is also declining, as the chart above on electricity production and consumption from this post on the FT Alphaville blog indicates.

The polymer industry executive sees no prospect of a recovery among the SMEs before the end of 2012 because of the increased caution of banks worried about rising bad debts.

The risk of worsening bad debts arises from a very weak trading environment, resulting in numerous SMEs going bust.

A classic vicious circle seems to have developed: As SME bankruptcies increase, bank lending is further curtailed making further bankruptcies likely.

This suggests that even though China's central bank pledged on Sunday to intensify policy fine-tuning in an effort to help the real economy, the SMEs will continue to struggle.

And, interestingly, the industry executive also believes that, despite the hype, renewed economic stimulus is very modest because politicians are too busy focusing on the once-in-a-decade leadership transition, which begins from October.

"China's economy feels as if it is actually shrinking and the situation is now worse than during the financial crisis," he said.

"The SMEs have less money than they had in late 2008. The reason is that the banks are not prepared to lend money to the SMEs because they are worried about rising bad debts and the effect on their share prices.

"In the past, when the government had more control over the banks, they could order them to lend to anybody.

"The big companies still have easy access to money. But our smaller customers are running at operating rates of below 60 percent compared with 90-100 percent in 2010.

"The leadership will do very little before the handover of power and the sooner the handover happens, the better. Once the new leaders are in place, I think the economy will get better.

"Once they are in place they should use their big cash reserves to get consumer spending going again.

"Only a few months ago we were talking about inflation being a problem and now it is deflation. The Chinese leadership should be able to tolerate a little bit of inflation."

By John Richardson

India, along with China, seems unlikely to deliver the contribution to global economic growth expected by the International Monetary Fund as late as April of this year (see above chart).

In the case of India, last week's power cuts that affected more than 600 million people, point to deep structural problems that could well affect the health of the economy for many years to come.

Energy networks need hundreds of billions of dollars in new investment to sustain India's economic rise, says the Financial Times in this article.

"But the banks are hardly in a position to provide the funding. They are already overexposed to energy companies in frail health, raising the spectre of loan defaults," warns the newspaper.

It describes a "toxic combination of inadequate fuel supplies, debt-laden power generators and bankrupt state electricity boards".

Anil Ambani, chairman of Reliance Power has even gone as far as to warn that power sector-associated debt problems mean that India faces "our version of the US subprime crisis".

As India and China continued to boom post Lehman Bros, few people, especially in the financial sector, were interested in asking the hard questions about whether their growth was sustainable.

This was a great story that made investors lots of money, provided they got their entry and exit timings right.

Similarly in chemicals and polymer markets, producers and traders made great money from the strong contribution to global consumption growth post-2008 that was provided by India and China, while privately admitting that it might not last.

Where do we go from here?

India isn't, obviously, going to collapse. It is just that expectations need to be tempered.

Context is also important here and the essential context is that, despite India's tremendous recent growth, it remains a long way behind China.

"In the case of PVC, for instance, per capita consumption is just 1.5 kilograms compared with China's 10 kilograms," says a source with an Indian PVC producer.

Chart sourced from: http://www.financialsense.com/

By John Richardson

"THE worse things get the better they are," continues to be the mantra in financial and commodity markets these days.

For example, China's inflation slowed to 1.8 percent in July compared with 2.2 percent in June. This is likely to spur expectations of more economic stimulus.

The logic is that 1.8 percent is well within the government's annualised target of 4 percent, and represents a significant achievement compared with July 2011. During that month, inflation hit a three-year high of 6.5 percent.

But chemicals and polymer markets are telling us that lower inflation is not a government victory, but instead indicates the severity of the economic slowdown.

Cash-starved small and medium-sized enterprises face ever-weaker demand, both domestically and overseas, a polyolefin industry executive told us earlier this week.

"The negative sentiment has also extended to the final consumers," a second industry executive told us yesterday.

"On a recent trip to China, I was really surprised by how sentiment had changed. People don't want to spend money in the shops because they are worried about their jobs. They are also delaying purchases because they think prices are going to fall."

This is, obviously, only one small sliver of anecdotal evidence, but in mid-July, Chen Dongqi, deputy chief of a central government economic think tank, told Reuters: "In particular we should prevent producer deflation from expanding to the consumer area in the second half of 2012.

"Once deflation happens in consumer prices, we would pay a big price for policy changes to solve the problem."

The big question remains whether Beijing will be able to carry out sufficient economic stimulus in H2 to get the economy buzzing again, given that it is focused on the leadership transition. As we again discussed earlier this week, our first industry executive thinks not.

It might be that the job of getting the economy going again has been delegated to local authorities.

"Instead of the mammoth stimulus programme led by the central government when the global financial crisis erupted in 2008, local governments are this time taking charge, trying to accelerate spending and rally investors and banks to hop on the bandwagon," wrote the Financial Times in this article earlier this week.

They used the example of Changsa, a city in central China, where a staggering $130bn is due to be spent on infrastructure projects - 150 percent of the city's 2011 GDP.

The risk is that this will add to China's bad-debt problems due to the construction of yet more "white elephant" infrastructure projects.

Other concerns include further environmental damage and greater opportunities for corruption. In June, the China Daily reported that the city of Shenyang, in northeast China, had just blown-up a nine-year-old sports stadium, which had cost $126m and was the largest in Asia when it was built.

"I don't know how much of our GDP comes from this make-and-break game played by some local officials. But I do know it not only wastes resources and causes irreversible environmental damage. It is also inevitably provides a hotbed for rampant corruption," wrote the newspaper's reporter.

By John Richardson

CHINA'S steel production is expected to decline for the first time in 31 years during 2012. Yes, 31 years.

"The end of three decades of growth in a key industry will add to hand-wringing over China's economy," wrote Chuin-We Yap in this Wall Street Journal blog post.

"China makes half the world's steel - a third of which goes into the bellwether construction sector - and the rest into everything from cars to home appliances and the national grid," he said.

But he added that falling output might be a blessing in disguise in that it would "mould the bloated industry into line with the government's wishes.

"Beijing has tried for years to cull overproduction, which it blames for the country's inability to control iron ore prices, ditch dirty old mills, and focus on high value added products."

Then again, though, as we discussed earlier, steel demand might gain a H2 boost from local authorities being given free reign to spend huge sums of money on infrastructure, even if it means blowing-up more nine-year-old sports stadiums.

Demand for chemicals and polymers that go into the construction would also, of course, benefit.

There is nothing new in this, as this 2010 post from Zero Hedge indicates.

"As one of the most architectural productive countries, China aggregates 2 billion m2 of new building area every year, consuming about 40 percent of the world's concrete and steel," said the post.

"However, on the flip side of the new building fever, there lies the rubble and remains of other 'older' buildings. People tear down four-star hotels to build five-star ones and bulldoze newly developed construction sites before they are even finished."

For example, see below a picture of the five-year-old Yuxi Exhibition Center, in Yongchuan City, Chongqing Municipality being blown up in 2005. 

If many more buildings get blown-up as a new construction boom grips China, what will this say about efforts to create more sustainable growth?

By John Richardson

MONO-ETHYLENE glycol (MEG) exports to China rose to 4.12m tonnes in the first half of this year from 3.38m tonnes during the same period in 2011, according to data from Global Trade Information Services (GTIS).

The main beneficiary of the export surge was the Middle East as H1 2012 exports from Kuwait surged by 74% with Saudi shipments 22% higher.

And as you can see from the chart above, again thanks to data supplied by GTIS, Middle East first-half 2012 exports were up by 45% compared with H1 2010 and H1 2011.

China's MEG market was oversupplied because of "huge imports" from the Middle East, Singapore and Taiwan, Thailand's PTT Global Chemical said last week, as it announced a 90 percent drop in its second-quarter net profit.

In actual fact, Singapore's exports fell in H1 2012 over the same period in 2011 by 8 percent with Taiwanese shipments 4% lower.

Nevertheless, PTT Global's overall argument is backed up by reports that in May of this year, coastal storage tanks in China held a total of 860,000 tonnes of MEG. Normal inventory levels are 400,000 tonnes.

Their oversupply argument is further supported by the decline in pricing, as the chart below illustrates.

The Middle East has been able to gain market share in a weak market because of its unbeatable feedstock-cost position, as has been the case in polyethylene (PE).

If PTT Global, an ethane-based cracker operator, was unable to make money from MEG and other petrochemicals, this indicates just how bad market conditions have become.
Naphtha-based producers in Taiwan and South Korea must, obviously, be in an even worse position.

Last week, MEG prices increased as a result of turnarounds at plants in Saudi Arabia and Singapore and an outage caused by a fire at an EQUATE facility in Kuwait . A total of 2.77m tonne/year of capacity is idled, according to ICIS pricing fibre intermediates editor, Becky Zhang.

We are also about to enter the peak manufacturing season for China's textiles and garments industry, giving some traders further hope that the price rally will last.

In addition, China is due to add 8.3m tonne/year of purified terepthalic acid (PTA) capacity in the second half of this year with a total of 18.5m tonne/year set to be commissioned by 2015, according to ICIS data. (PTA producers need MEG to make polyester resin - polyethylene terephthalate).

But, as we keep saying, demand is the thing, and demand is exceptionally weak in China. This suggests that the peak manufacturing season will be very disappointing.

And do high inventory levels in Q2 indicate that China bought ahead of its second-half requirements?

By John Richardson

CHINA's bank lending slumped by 41.3 percent in July from the previous month, the country's central bank announced last Friday.

This was well below the median forecast of 14 economists polled by Dow Jones newswire, and added to the gloom created by the earlier release of disappointing trade, output and retail sales figures.

Medium to long term loans to enterprises also fell in July - to Yuan92bn, the lowest level so far this year, compared with Yuan163n in June. The loans are viewed as an important measure of investment appetite.

Economists said that reluctance to borrow money by companies was a big factor behind the loan-growth statistics. This is consistent with what we have been hearing in petrochemicals markets for several months now.

"Loans to small and medium firms fell in July," a loan officer at a major state-owned bank told the Wall Street Journal (WSJ). As we discussed last week, the big banks, worried about non-performing loans (NPLs), are reluctant to lend to small and medium-sized enterprises (SMEs).

Big companies have plenty of financing, and have taken advantage of lower interest rates to pay off their debts, added the loan officer.

But until or unless the SMEs become more willing to borrow money, and the banks are more prepared to lend to them, there can be no significant recovery in chemicals and polymer demand. The reason is that the SMEs are responsible for the majority of chemicals and polymer buying in China.

One other explanation for the decline in lending is the growth of wealth management products (WMPs) that give investors an alternative to what have been abysmal rates of return on bank deposits, according to another article in the WSJ.

"WMPs are structured so that funds leave deposits at the beginning of the quarter and return at the end, in time for quarterly checks by the regulator," wrote the newspaper.

"Since the beginning of 2011, that has resulted in a new pattern in quarterly lending. In the first month of the quarter, falling deposits crimp banks' ability to lend. In the final month deposits rebound, and loans with them. The same pattern is evident in July, with deposits down by Yuan500.6bn."

But the WSJ added that the main reason for disappointing lending might turn out to be the weak business climate.

And so, where do we go from here?

Beijing might make further reductions in interest rates and bank-reserve requirements. Even easier lending conditions will, however, have little effect unless banks stop worrying about NPLs and companies become more confident.

The other hope for Q4 is that infrastructure spending, much of which is being carried out by local authorities, will boost growth.

As we shall discuss tomorrow, however, the state-owned banks might be unable to fund all the 500 or so infrastructure projects being planned - again because of the NPL issue.

Local authorities are also short of cash because their revenues have declined as a result of the economic slowdown.

China's financial system, as we shall also discuss tomorrow, is under such stress that this represents a threat to growth in 2013 and beyond.

 By John Richardson

NEW infrastructure projects in China (see above chart from Rio Tinto) might deliver a boost to chemicals and polymer demand growth in Q4 this year and into 2013.

But doubts are being expressed about whether some of these projects can be funded, given the build-up of bad debts in China's financial system since the late 2008 economic stimulus package.

"Banks' exposure to local government borrowers is greater than we anticipated," said Yvonne Zhang, a Moody' analyst in a statement last month, as the ratings agency raised its estimate of local government debt by Yuan3.5 trillion ($540bn).

China's National Audit Office says that local governments had amassed about Yuan1.7 trillion in debts by the end of 2010, about 25 percent of China's GDP. But Victor Shih, professor at Chicago's Northwestern University, puts the figure at 40-45 percent of GDP, in this interview with Credit Suisse.

Shih uses the example of the city of Tianjin, which has borrowed $64bn for the Binhai New Area, as the most extreme example of a local authority in deep water.

Investments include a $22bn Sino-Singaporean joint venture Eco City, an exhibition hall, an artificial beach, a stadium and, of course, a shopping mall, according to Foreign Policy magazine. Tianjin's debts are in excess of 47 percent of the city's GDP.

Shih believes that the bad-debt problem is more of a long than a short-term issue.

But Patrick Chovanec argues that most loans made by banks so far this year have been short term, points out Gordon Chang in this article in Forbes.

And Chovanec warns that lenders will soon need to use remaining liquidity to refinance wealth management and property trust products. In other words, they will be scrambling to find enough money to cover existing liabilities.

Chang draws a connection between Chovanec's views and the 41.3 percent fall in July bank lending.

Local authorities, as they struggle for new lending, are also facing a fall in revenues due to the economic slowdown, continues Chang.

This has resulted in new taxes being levied in an effort to balance the books.

"Taizhou, in prosperous Jiangsu province, has imposed an illegal 5 percent tax on rentals and has sent collectors door-to-door to demand the levy," he writes. 

"Fifteen cities and counties in Hainan, the island province, have collected only 17 percent of the budgeted land sale revenue.

"Hangzhou's tax revenues are down 2.7 percent this year. This figure does not include revenue from land sales, down more than 50 percent in the first six months.

"Xiangtan in Hunan has missed salary payments to teachers and not made pension contributions.

"It is rumoured that Wuxi could not pay salaries in May and that Ordos, the infamous ghost city, had to borrow from a state coal company to meet operating expenses."

Perhaps local governments, which are bearing the brunt of new stimulus efforts because of Beijing's political impasse, will somehow scramble enough money together to fund most of the infrastructure projects.

But that doesn't solve the problem of whether in the long term, China actually needs all these sports stadiums (some of which are being blown up!), artificial beaches and shopping centres.

China's bad debt crisis is at the very least, as Shih says, a longer-term threat to the economy.

By John Richardson

"HOW do a I tell my customers that polyethylene (PE) price rises are justified by more expensive naphtha, when the market is so weak?" asked an Asia-based sales and marketing executive with a major producer earlier this month.

A second executive with another producer, who has responsibility for the China market, expressed concern in late July that demand was not strong-enough to justify feedstock cost-driven price increases.

Since then the Asian PE market has spluttered along as a result of persistent caution. Prices have edged up and fallen back on converters reluctant to stock-up on resin because of the risk of inventory losses on a sudden correction in crude prices that would drive down naphtha, ethylene and PE.

Margins have been under pressure. For example, the ICIS Weekly Asian PE Margin Report for the week ending 10 August said: "Integrated PE margins in Northeast Asia collapsed this week, plummeting by more than $190/tonne into negative territory for the first time since early March.

"Integrated low-density PE (LDPE) margins are the most negative since ICIS records began in 2000.

"Naphtha prices climbed by a further $52/tonne, raising feedstock costs by 5.8%. Co-product credits fell by 0.7%, predominantly on a $300/tonne fall in butadiene prices."

In Europe, the impact of volatile naphtha costs on PE prices was summarised by this excellent report from the ICIS European polyolefins editor, Linda Naylor.

"In the week ending Friday 22 June, naphtha traded at a low of $683/tonne (€553/tonne) CIF (cost insurance freight) NWE (northwest Europe), leading to a record drop of €170/tonne in the July ethylene and propylene contracts," she wrote.

This led to a €170/tonne fall in July PE prices.

Naphtha had bounced back to $931-933/tonne on Wednesday of this week, resulting in a €200/tonne rise in spot PE prices and talk of a three-digit increase in September monomer contract prices.

And yet a distributor said: "I expect (European polyolefins) demand to be down by around 10% in 2012."

A PE buyer added that this was the widest range of price movements he had ever seen.

So what's going on?

As we argue in chapter 3 of our e-book, Boom, Gloom & The New Normal, oil markets are dysfunctional. The oil price is out of kilter with actual demand as a result of deregulation that has increased the influence of the speculators.

"The problem is the simple one of 'weight of money'," wrote Paul Hodges yesterday.

"Pension funds have become speculators in the markets - based on the conviction that commodities are a new asset class, alongside equities and interest rates. And they have the firepower to sustain the speculation for a long time."

The chart above, from the Chemicals & Economy blog, shows official weekly US oil and petroleum products inventory figures since 2008.

2008 levels (purple dash) were relatively low, causing prices to be strong until mid-year and the arrival of the financial crisis.

Since then, stocks have never been below the black line. This marks the peak inventory level at the end of 2008.

Supply is no longer a good guide to the direction of oil prices, however. Since the financial crisis, oil prices have been kept high by speculators, with period of extreme volatility.

Polyolefins serve as a good example of the damage that oil markets are causing to the real economy.

Source of graph: http://www.economist.com/

By John Richardson

AN assumption is that China's auto ownership will continue to rapidly expand and that, therefore, there will be a big need for substantial domestic expansions of butadiene and synthetic rubber capacity to make the tyres for the autos.

But auto ownership growth was "brought forward" by the economic package introduced in late 2008. This led to demand growth being concentrated in 2009-2010 that should have been spread across many more years.

Credit conditions have since been tightened, with the central and local governments also introducing restrictions on auto ownership for environmental reasons.The city of X'ian may soon join Guangzhou, Guiyan, Beijing and Shanghai in restricting vehicle ownership.

And in a June 2012 report, Citi said: "Interestingly, although (auto) ownership penetration in China remains low, at 60 cars per 1,000 drivers, annual sales have doubled since FY09 to around 24 per 1,000 drivers.

"This is similar to Brazil levels, and compares with around 40 in Europe or Japan.

"Given development variance between China's east and west, this suggests China eastern annualised sales per 1,000 drivers are getting very close to Western levels already - even if the fleet remains small relative to the population."

In short, vehicle ownership in economically-developed eastern China could be reaching saturation point.

Western China is much poorer and so will take many years to catch up with the east, resulting in relatively lower rates of growth in ownership of cars and trucks.

Growth in auto sales is also slowing down as a result of weakness in the overall economy, as the above graph illustrates.

Sales growth dropped to 2.5 percent in 2011 from 32.4 percent in 2010, according to the China Daily.

In the first half of this year, growth was only 2.9 percent, with further weakness evident in data for July.

Meanwhile, China's auto industry is in financial crisis, says the same China Daily report.

Government agencies are trying to force inefficient auto makers into bankruptcy in an effort to tackle the oversupply crisis, the newspaper says.

And yet the planned capacity of the country's 12 leading manufacturers will soon reach more than 30 million units a year, way in excess of demand, warns the National Development and Reform Commission.

As for butadiene, some 1.18m tonne/year of new plants are due on-stream in China by 2013, according to ICIS data.

"Each of us only has one child, but for each child there are several new industrial projects," a contact in China recently told one of the blog's colleagues.

               LDPE margins in 2012     

By John Richardson

NORTHEAST Asian integrated low-density polyethylene (LDPE) margins keep plunging new depths.

The margins were at their most negative since ICIS records began in 2000, according to the ICIS Asian PE Margin Report for the week ending 10 August.

And the report for the week ending 17 August said that they had fallen even further - by $17/tonne.

Integrated high-density PE (HDPE) margins were also down, by $16/tonne - their lowest since early March of this year.

"The declines were on a 1.3 percent rise in naphtha feedstock costs as naphtha prices increased by $13/tonne, which outweighed a $15/tonne rise in PE prices," said the 17 August report.

LDPE has been under pressure from increased low-cost shipments to China from Iran. In January-June this year, Iran saw its exports surge by 40 percent compared with the same period in 2011, according to Global Trade Information Services (GTIS).

HDPE exports from Iran to China were also up - by 55 percent - when the same two six months periods are again compared using GTIS data.

Iran is reportedly being forced to produce more PE because tougher sanctions have made it much-harder for it to ship ethylene.

And, of course, with Iran facing an overall tougher sanctions regime, making it difficult for it sell just about anything to many countries in the world, Chinese PE buyers have the upper hand.

LDPE is also being affected by new capacity.

Qatar Petrochemical Co (QAPCO) brought its 300,000 tonne/year plant on-stream in June.

Saudi Kayan Petrochemical Co's 300,000 tonne/year LDPE plant is scheduled to start-up in Saudi Arabia in Q3, but some reports suggest that commissioning might be delayed until the fourth quarter.

But maybe we are overcomplicating things.

The overall story seems very simple. LDPE is merely the canary in the coalmine because of specific issues that have made its margin depletion the worst for Northeast Asia, which, because it is naphtha-based, is always going to suffer the most in a weak market.

What matters most for the polymer is that overall PE apparent demand in China fell by 1 percent in H1 2011 over the first half last year, and by 3 percent over H1 2010.

This compares with a 53 percent demand increase in 2008-2010 on a huge economic stimulus package by the Chinese government.

This brought demand forward as an army of new traders entered synthetic resins trading in general. They hoarded speculative volumes on the hope that the 53 percent growth in 2008-2010 would be sustained.

But it wasn't. Growth could never, realistically, be sustained at such a level.

Demand declined in 2011 as government stimulus was withdrawn.

And in an important report released by HSBC in June, the bank underlined what the blog has been hearing since early 2011 when it wrote: "Polyethylene, polypropylene (PP), polyvinyl chloride (PVC), polyethylene terephthate (PET) and acrylontrile butadiene styrene (ABS) demand growth has averaged just 2.7 percent since the first quarter of last year, compared with a 9.1 percent increase in GDP."

The reason is that inventories from polymers down to finished goods are still at high levels following the 2008-2010 increase in speculation.

Demand has also taken a big hit from the economic slowdown in China, the severity of which has taken many people by surprise.

Source: ICIS

By John Richardson

CHINA'S fibre intermediates industry could end of being a game of two halves in 2012, to use an old football (or soccer for the benefit of our America readers) cliché.

The reason is that the first half of the year was characterised by very weak demand as the overall economy slowed down.

And yet traders still kept buying lots of mono-ethylene glycol (MEG) to ship to China during H1, contributing to a steep rise in imports

"Coastal inventories at one point totalled 900,000 tonnes during the first half, more than enough to meet average monthly demand of around 800,000 tonnes," said Becky Zhang, ICIS pricing's Asian fibre intermediates editor.

The same applied to purified terepthalic acid (PTA) and polyester. Everyone had underestimated the extent of the economic slowdown and so inventories down the chain were around one month.

Now inventories down the fibres chain are at two weeks or less as a result of stronger demand growth in Q3.

The market has picked up a little on the build-up to the next peak textiles and garments manufacturing season, which takes place in Q4.

There has been a lot of talk about textile and garment mills being badly affected by a slowdown in exports to Europe during this year.

But Zhang made the point that the mills have been dealing with this problem since 2009 and that, to some extent, they have found compensation through improved domestic sales.

Nevertheless, despite the Q3 pick-up, Zhang now expects that China's 2012 polyester demand growth will be in the region of 8 percent compared with her earlier estimate of 10 percent.

The Q4 peak season might also turn about to be damp squib, given all the macroeconomic problems.

And in a sign of just how volatile the fibre intermediates business has become, sentiment turned bearish during the week ending 17 August, after several weeks of recovery, added Zhang.

This was the result of a two-day increase in average polyester yarn raw-material inventories in China.

PTA and MEG pricing also declined in response to a weaker PTA futures contract on the Zhengzhou Commodity Exchange.

The futures contract has become an increasingly important guide to short-term physical pricing movements since it was launched in 2006. Every scrap of macroeconomic and oil-market news move the contract.

MEG producers are, however, laughing all the way to the bank because of production problems at several major Middle East plants that have significantly tightened supply.

Zhang added that a reason MEG shipments from the Middle East to China were so high in H1 was that plants were running flat-out on the greater availability of associated gas. More associated gas has become available due to higher OPEC oil output quotas introduced in an attempt to put a cap on expensive crude.

Profitability in the purified terephthalic acid (PTA) business is something altogether different - or to be more precise, it has been non-existent for some producers since late 2011, said Zhang.

The reason is chronic oversupply as a result of new capacities being brought on-stream in China. Eleven new plants are due to start-up over the next three years, with a total capacity of 18.5m tonnes/year. The country's total PTA capacity is due to reach 39m tonnes/year in 2015 - double that of 2011, according to ICIS.

A further factor is lack of sufficient paraxylene (PX) to supply a lot of these new plants.

"Chinese PTA producers are in a better position than their overseas competitors because they depend mainly on domestic supplies of PX which are more affordable than imports," said Zhang.

China's PTA producers have the market muscle to set domestic prices for PTA at levels that further help to guarantee profitability, it has been claimed.

Not so the Thais, Taiwanese and South Koreans who will likely continue to struggle.

China's PTA industry serves as an example of of two aspects of the New Normal, which are:

*Constant increases in Chinese petrochemicals self-sufficiency, beyond the range of some estimates.

*New producers in China enjoying strong advantages in domestic markets, enabling them to always run at high operating rates.

Source: ICIS

By John Richardson

Reliance Industries is going boldly (no split infinitives here) where nobody has gone before: It is to build a cracker, which could eventually produce 1.6m tonne/year of ethylene, based entirely on off-gas feedstock supplied by its 1.24m tonne/year of refinery capacity at Jamnagar, Gujarat, India.

Nobody has attempted anything on this scale before as the biggest previously-built cracker that ran entirely on off-gases had a capacity of only some 100,000 tonne/year, the blog understands.

But Reliance has a reputation of getting it right and so this seems very likely to be a major success. A recent Goldman Sachs report, as fellow blogger Malini Hariharan points out in this article, said that the cracker's ethylene costs of production would be competitive against Middle East producers, and would be cheaper than US shale gas-based projects.

The cracker's capacity will comprise ethylene generated by cracking refinery off-gases, which contain around 1.1m tonnes/year of ethane, and the recovery of 400,000 tonnes/year of ethylene from the off-gases, adds Hariharan.

She also describes how there will be a neat integration between a new petcoke gasification plant and the cracker complex, both of which will be located at Jamnagar.

The petcoke unit will create syngas fuel for the refinery and the new petrochemicals complex, replacing the liquefied natural gas (LNG) and refinery off-gases currently being used, she writes.

The petcoke unit might also eventually supply carbon monoxide to an acetyls unit.

"It is our target that this [petcoke project] will add 30 to 40 percent to the integrated Jamnagar complex margins within the next three years," said Reliance chairman Mukesh Ambani in June.

Reliance has already confirmed derivatives investments downstream of the new cracker, including polyethylene (PE) and mono-ethylene glycol (MEG) (see above table).

The cracker will also produce 150,000-160,000 tonnes/year of propylene, part of which will be utilised to produce polypropylene (PP) co-polymer at the existing PP plants at Jamnagar.

Reliance is to also expand paraxylene (PX), purified terephthalic acid (PTA) and polyester capacities at Jamnagar and other sites in India, which will bring its total new investments in petrochemicals to $12bn.

Most of the new capacities should be absorbed by the domestic market, provided economic problems don't get an awful lot worse.

By John Richardson

THE economics of China's coal-based olefins industry are favourable when measured on a cash cost basis in a high oil-price environment, as the slide above from the Singapore-based consultancy Methanol Market Services Asia (MMSA) illustrates.

But even when oil prices decline, which occurred in May this year, swinging cash costs back in favour of the naphtha-based producers, there are other factors which underpin the economic strength of the coal-based industry, said Mark Berggren, managing director of MMSA.

"One of the advantages from a coal producer's perspective is that you are taking coal, which sells at around $100/tonne and converting it into polyolefins that sell at well over a $1,000/tonne," said Berggren.

(The industry involves firstly gasifying coal into synthesis gas (syngas), which is then turned into methanol, next olefins and then polyethylene (PE) and polypropylene (PP). The methanol-to-olefins (MTO) process produces both ethylene and propylene. There is also a separate propylene-only process - methanol-to-propylene (MTP). )

"China's railways also have limited bandwidth. It therefore makes much more sense, from a national perspective, to transport plastic pellets rather than coal, as the pellets deliver greater economic and energy value per railcar-load than coal."

Berggren believes that a considerable amount of planned new MTO capacity will go ahead because of sound economics, and for strategic and political reasons.

"By 2030, our base case, to which we attach a 65% probability, is that 28m tonnes/year of methanol will be converted into olefins in China. This will yield around 10m tonnes/year of olefins," he said.

Other estimates are that this amount of capacity will be on-stream by 2020, but Berggren argues that there are insufficient engineering and procurement contractors in China for this to happen.

"China was supposed to have 100m tonnes/year of methanol on-stream by now, but only 42m tonnes/year has so far been commissioned because of a lack of engineering resources," he added.

But he stresses that the government is committed to MTO because it represents a demonstration of national pride, and is part of the drive to raise self-sufficiency in basic raw materials.

Under China's 12th Five-Year-Plan (2011-105), for example, Beijing wants to raise ethylene self-sufficiency to 64% in 2015 from 48% in 2010. The target for propylene is an increase to 77% from 63%.

"Coal-to-olefins projects are also big in scale which fits in with another government objective - improving the economies of scale of its industries," Berggren said.

"In addition, realising MTO projects will involve the successful implementation of technologies that have ostensibly been developed domestically."

But he said that environmental issues would remain a background concern for MTO. Question marks have been raised over the sustainability of the industry as a result of high levels of carbon dioxide (CO2) emissions and heavy water consumption. Existing and proposed plants are located in Western China, where water is in short supply.

"The coal gasification step is where large amounts of water are consumed," he added.

"But this water can be recycled following treatment. And when you make olefins, which involves converting methanol via dimethyl ether over catalysts, water is left over from the process which again can be treated and re-used.

"On the issue of CO2 emissions, which are again high during the gasification step, the coal companies argue that you need to compare life-cycle emissions between coal and oil.

"More energy is required to get oil out of the ground than is the case with coal, especially in the case of deep-sea oil drilling, the companies point out.

"You can also sequester the CO2, and, if it has the right purity, it has a commercial value for re-injecting into oil wells to advance oil recovery."

Berggren said that not all MTO projects are based on domestically-produced methanol, via coal. Some project proponents are instead planning to import methanol.

This latter category includes Skyford Chemical. The company is due to start-up 600,000 tonne/year of MTO capacity (200,000 tonnes/year of ethylene and 400,000 tonnes/year of propylene) at Zhenhai, Zhejiang province, in Q4 this year (see the table below for a full list of projects).

"The problem with this approach is that the gas resources, for the moment at least, are under separate ownership to that of the MTO players in China," said Berggren.

"As a result, there is an issue for MTO players in that the owners of the gas reserves often see a stronger value into other uses for their hydrocarbons, such as liquefied natural gas.

"But I wouldn't be surprised that at some point, the Chinese go overseas and acquire their own natural gas reserves to make methanol in, say, the Middle East to ship the methanol back to China to make olefins."

By John Richardson

THE recovery always seems to be three to six months away.

Thus, as hope fades for a Q4 economic rebound in China, a marketing and sales executive with a major European speciality chemicals player told the blog earlier this week: "Everything will be fine in the New Year once China's new leaders are settled in.

"I think they will adopt very accommodative policies for growth."

But, assuming that the political handover is handled smoothly, and that is a pretty big assumption, China's new set of leaders will still face the same long-term structural problems.

Those at the ground level of China's economy are telling us that something is very wrong.

Vale, the world's largest iron-ore producer, has said that China's golden years of economic growth are over, reported Bloomberg.

"The Chinese economy is only at the beginning of a harsh winter," said Zhang Hongxia, chairman of China's largest cotton- textile maker in this second Bloomberg article.

"China now is facing a situation where everything from coal to steel inventories is piling up."

Synthetic resins face their own inventory problems.

The above comments are in line with what we have been hearing from polymer industry executives with responsibility for China - another group of people at ground level. They have identified changes in the behaviour of their customers which reflects what is happening in the wider, real economy.

The above chart illustrates what we discussed on Monday - how low-density polyethylene (LDPE), the "canary in the coal mine" polymer, is struggling with its worst margins since at least 2000.

Other petrochemicals and polymers also appear to be struggling, according to data provided to ICIS by the China Petroleum and Chemical Industry Federation (see table below). January-July and July production in China was down for several products.

Source: New York Times

By John Richardson

INVENTORIES of finished goods are mounting in factories across China as manufacturers continue to run hard, according to this New York Times article - perhaps in the hope that in 3-6 months time, everything will be alright again.

"My supplier's inventory is huge because he cannot cut production - he doesn't want to miss out on sales when the demand comes back," Wu Weiqing, the manager of a faucet and sink wholesaler, told the NYT.

Here is another explanation, from Forbes:

"It is more likely that Wu's supplier has been told by the local government to keep production lines going no matter what.

"And why would city and municipal officials do that? For one thing, local officials don't want to deal with unrest that idle workers cause. Moreover, lower-level cadres are judged by growth in their districts. The value of a sink sitting in a factory's inventory, even if never sold, is counted as gross domestic product."

Carmakers have solved their inventory problems by forcing dealers to take autos they cannot sell, adds Forbes.

"Inventories at the dealers in the first six months of the year increased by 900,000 units. These retailers are now carrying 2.2 million cars in their showrooms. Even with dealers taking unneeded cars, the manufacturers are operating at around 65 percent of capacity when 80 percent is thought to be the breakeven point," continues the magazine.

And yet, underlining our argument about the difficulties in changing China's investment-focused growth model, auto production capacity keeps on increasing.

For example, over the next three years, auto production is set to rise by an amount equal to all the factories in Japan, and nearly all the factories in the US, says the central government's National Development and Reform Commission.

And what is Beijing's solution to the problem? Manipulate inventory data, according to both the NYT and Forbes as politicians try to understate the scale of the problem. This might well be motivated by the desire to keep a lid on social unrest during the leadership transition.

But the HSBC Flash PMI for August shows that inventories climbed by their fastest rate since the survey began in April 2004.

Source of table: The Economist

By John Richardson

WHEN you are an energy giant such as Shell you can afford to explore multiple avenues in an effort to profit from China's long-term energy needs.

Thus Shell re-affirmed last week that it plans to invest $1bn in a year in exploiting the country's vast shale-gas reserves, which are even bigger than those in the US (see above table), even though:

*A lot of the reserves are in mountainous regions, thereby requiring construction of new bridges roads, etc.

*Some of the reserves are in areas short of water, whereas other shale-gas fields are in Sichuan - where there is a big alternative demand for water for rice cultivation. The "fracking" process is water intensive, although engineers argue that this is just a cost issue as water can be treated and recycled.

*Peter Voser, Shell CEO, admitted in June that China's shale gas reserves are "geologically challenging". Shale gas fields in China are around 10,000 deep, twice as deep as those in the US, according to Tony Regan of the Singapore-based gas consultancy, Tri-Zen.

But as we discussed in March, China is becoming more open to doing deals with the IOCs which might already have the technologies, or might develop the technologies, to overcome these challenges. Shell revealed, in the same announcement last week, that China is to become its global research hub for unconventional oil and gas technologies. 

Shell also disclosed that it is move its global headquarters for coal-bed methane to China. China expects coal-bed methane to meet 15 percent of its energy needs by 2020.

This may not be comparable at all to China, but in Queensland in Australia the coal-bed methane industry has encountered problems as a result of what Regan says has been the "psychology" of assuming that it would be technically easier than shale gas. In reality, it has on occasions proved as technically challenging, leading to disappointing gas production from initial exploration work.

Meanwhile, construction work on the Qatar Petroleum, Sinopec and Shell refinery and petrochemicals complex in Taizhou, Zhejiang province is due to start this year, according to ICIS.

The project, costing an estimated $12.6bn, will make use of imported condensate feedstock and will include a worldscale cracker and a 300,000 bbl/day refinery.

Qatar Petroleum and Shell have what China needs - hydrocarbon reserves - in return for which they get to serve the government's desire to raise petrochemicals self-sufficiency.

The other prize is the refinery sector, provided price controls on refinery products, such as gasoline and diesel, are eventually lifted. At the moment, as the Sinopec first-half results revealed, refining is a very difficult business in China.

 By John Richardson

LET'S put this into context: China's polyethylene (PE) demand grew by 53 percent in 2008-2010.

Growth during the first seven months of this year was just 1.7 percent over Januuary-July 2011, according to Global Trade Information Services (GTIS).

And when compared with the same seven months in 2010 growth was flat, as the above chart illustrates.

Also compared with 2010:

*Middle East shipments to China surged by 40 percent, The big winners in the region included Iran (up 24 percent as more ethylene has been polymerised to avoid sanctions) and Saudi Arabia (23 percent higher). Saudi production has increased on greater availability of associated gas.

*New capacity in Thailand resulted in a 131 percent rise in the country's exports, as Southeast Asia as a whole gained 27 percent.

*South Korean exports were down by 21%, which further underlines the problems confronted by the region's higher-cost exporters. Overall Northeast Asian exports were down by 32%. 

There is something seriously wrong when demand is so much below GDP growth, which was 7.6 percent in Q2.

This reflects lingering inventory problems in all the synthetic resins (the demand growth story is likely to be very similar for the other resins).

And, as we discussed on Monday, stockpiles of finished goods are increasing as the economy slows down.

A further problem for the poylolefins business is that supply is set to increase next month, when the first on-spec shipments from the Saudi Polymers plant in Saudi Arabia are expected. The facility includes two 550,000 tonnes/year high-density PE (HDPE) units and one 400,000 tonne/year polypropylene (PP) plant.

By John Richardson

"You cannot just sit back and expect things to happen the way they have happened in the past, especially in emerging markets." This insight from a senior Asian-based executive with a global polyethylene (PE) producer highlights the risks faced by the global industry as we transition to the New Normal.

The executive added:

"The key to success is to stay on top of developments in the economy, society and politics and constantly think how these are changing and how you need to reposition your business. You need lots of good people on the ground who can detect micro changes at the level of your customers that can become major economic and social trends."

The interview is contained in this new ICIS Chemical Business article. This argues that planning during the Supercycle was based on the theme of Kevin Costner's 1989 movie, Field of Dreams (above) - 'if you build it, they will come'. Today, however, a difficult transition is underway, as we describe in Boom, Gloom and the New Normal.

The risks are rising all the time that policy makers will fail to deliver a return to the supercycle. The winners will instead be those companies who refocus on the new economic and social trends that are already starting to drive future growth.

To download a free copy of the article, please click here.

By John Richardson

MITT Romney is playing a dangerous game with pre-election rhetoric that might end up tying him to a policy decision that results in a US-China trade war, warns Stephen Roach, the former head of Morgan Stanley Asia and senior fellow at Yale University, in this article. in yesterday's Financial Times.

The Republican presidential nominee has pledged that on day one of him being elected to the White House, he would declare China a currency manipulator.

Roach warns that this would lead to China imposing 20 percent import tariffs on all US goods, with the US doing the same.

Stock markets would swoon he says, and he concludes:

"By the autumn of 2013 there was little doubt of the severity of renewed recession in the US. Trade sanctions on China had backfired. Beleaguered American workers paid the highest price of all, as the unemployment rate shot back up above 10 percent. A horrific policy blunder had confirmed that there was no bilateral fix for the multilateral trade imbalance of a savings-starved US economy.

"In China, growth had slipped below the dreaded 6 percent threshold and the new leadership was rolling out yet another investment stimulus for a still unbalanced and unstable Chinese economy. As the global economy slipped back into recession, the Great Crisis of 2008-09 suddenly looked like child's play. Globalisation itself hung in the balance.

"History warns us never to say never. We need only look at the legacy of US Senator Reed Smoot and Representative Willis Hawley, who sponsored the infamous Tariff Act of 1930 - America's worst economic policy blunder. Bad dreams can - and have - become reality."

The problem is that as Singapore-based trade lawyer Ed Sim told us in June, Romney's pledge looks as if it isn't just election rhetoric.

"We recently had an audience with Mitt Romney's trade adviser in Washington DC," said Sim.

"He confirmed that, yes, on day one of him being President, Romney would declare China as a currency manipulator."

Sim added that the Chinese would regard Romney's declaration as a strategy to prompt negotiations, rather than a firm statement of policy.

"How would China react? Pragmatically, it might ignore the rhetoric during the first few days of a Romney administration," said Sim.

But what if Romney feels compelled to follow through with his pledge in order to keep an increasingly factionalised Republican Party happy?

And since June, growth has slowed down in China far more than most people expected and so the mood in Beijing could well have changed.

A strongly worded commentary in the government-run China Daily, which was published this Monday, suggests that the mood might indeed have shifted.