HSBC: China 2013 Polyethylene Market Has Peaked

HSBC3.pngBy John Richardson

A NEW report from HSBC backs up our concerns that the post-Chinese New Year polyethylene (PE) will be weaker than in December-January.

The bank is with us in thinking that the stronger markets over the last two months have been driven by:

*Lagging indicators such as strong export and import data and purchasing manager’s indices (PMI) for December-January. The PMIs were also open to different interpretations, we think.

*Restocking ahead of the Chinese New Year as converters sought prompt cargoes (see above chart of China resin inventory levels).

*Turnarounds and outages that signicantly tightened markets. “Over the course of Q4’12/Q1’13, over 5 million tonnes of annualised capacity in the region (c30% of the region’s installed capacity base) was hit by shutdowns,” says HSBC.

But now:

*The turnarounds are coming to an end with a great deal of new capacity coming on-stream. “The peak period for these outages was the first 3-4 weeks of January when PetroRabigh, Saudi Polymers and Borouge 2 were all down at the same time. Supply this year is being added in Asia (China, Singapore), the Middle East and the US. China is adding four new crackers over a 15 month period from Q4’12 to Q4’13, with effective capacity growth of 1.8 million tonnes/year, or 12% of the existing capacity base,” adds HSBC.

*It is very unlikely that Chinese growth will be able to do the “heavy lifting” to support all this new capacity because of economic rebalancing in China and a weak export environment. “While it is certainly possible to see Chinese demand grow at a rate of 10%, given a reaccelerating Chinese economy – the CAGR over 2006-12 was 9.8% – it is unlikely that growth will be strong enough to absorb the 1.8m tonnes/year that China is adding and also absorb the c2.2m tonnes/year of capacity being added in Saudi Arabia, Singapore and the US. In order to absorb all of the domestic supply, as well as the new Middle East and US supply, Chinese demand growth would need to average over 15% in 2013, a situation we believe is highly unlikely,” says HSBC. The bank’s base case for growth is 8%, but adds that growth lower than this is possible.

Thus, the best of the year for spreads, and perhaps therefore margins for the higher-cost producers, is over, according to HSBC.

Margins in December-January were hardly worth writing home about.

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