Weak PE Margins Reflect Big Picture

JR Margins.jpgBy John Richardson

BEFORE we look at last week’s political handover in China in more detail tomorrow, while on Friday we will return to our theme of Asian demographics, the above slide illustrates what the big picture has meant for the polyethylene (PE) industry.

As you can see, variable-cost margins for Northeast Asian producers fell into negative territory in September-October and have only slightly recovered in November, according to the ICIS Asian PE Margin Report.

“All of Asia’s naphtha-cracker operators are losing money,” said a PE industry source.

China’s plastic converters ran their factories at low operating rates and were reluctant to invest in new capacity immediately ahead of the handover. This, of course, also applied to many other industrial sectors. This has been one of the reasons for the weak market.

A theory being put forward was that if the right “pro-growth” leaders were selected, China would return to its previous strong growth trajectory by as early as Q2 next year (once the new president and prime minister have formally taken office).

Traders live and die by volatility and so this kind of story can serve their short-term objectives.

But the long-term reality is that regardless of the composition of the new Standing Committee, we had long felt that China faced a protracted period of much-lower GDP growth because of its economic imbalances.

Nothing has therefore, of course, changed followiing last week’s political transition.

And, as we shall discuss tomorrow, many commentators worry that China’s new leaders will fail to deliver.

The country’s ageing population is one of the new Standing Committee’s many challenges.

This is one of the factors behind rising wage costs that have led to a low-value manufacturing drift away from China, thus weakening PE consumption.

Higher-cost producers always suffer in a weak market, as the chart above indicates. China’s PE demand growth was just 4% in January-September this year.

We can see no reason why next year will be any better.

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