Morgan Stanley Turns Bearish

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By John Richardson

AN interesting new report from Morgan Stanley underlines what we have been hearing about Chinese chemicals demand.

The investment bank writes:

“We returned to China and offer a revised message versus our trip last year. Instead of a ‘pause” in growth’, we now see a structural slowdown. China is in the midst of a transition from basic chemicals blighted by overcapacity to an increased focus on R&D and innovation to grow in speciality chemicals.

“We met with 18 companies and associations in China. Underlying chemical industry growth is under pressure as the Chinese chemical industry rebalances following a number of years of stimulus-driven growth in basic chemicals that has led to overcapacity and low levels of profitability.

“There is a deteriorating growth outlook across the Chinese chemical industry. The CPCIF (the China Petroleum and Chemical Industry Federation) highlighted chemical industry growth of 12.5 percent in 1H12, which deteriorated to just 3.6 percent growth year-on-year in June and slowed further to 1.0 percent in July (the lowest monthly growth rate in five years).

“Although the CPCIF stands by its industry growth target of 10 percent for 2012, few companies we met with predicted a meaningful improvement in activity to year-end.

“We do not expect (further) major stimulus. With the basic chemicals industry in China suffering overcapacity in certain products, there is a need to see closures.

“No company we met with thought the new leadership would announce 2009-scale stimulus packages. Further, chemical state-owned entities were actively against stimulus, arguing that capacity surpluses need to be addressed without government support.

“A high position on the cost curve, coupled with existing overcapacity, could trigger a reappraisal of China’s expansion plans in petrochemicals.

“We expect an increasing focus on R&D, innovation, and development of its speciality chemicals activities to improve chemical industry returns in China.

“However, the industry has to get through a multi-year transitional phase, which is likely to present growth opportunities for Western speciality players that already have coveted technologies.”

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