PVC’s Unsustainable China Growth

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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.

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