More Than Just Absence Of “Animal Spirits”

By John Richardson

THE blog held a full day of discussions with our ICIS China price reporting team in Shanghai (we will provide a lot more details next week) and the story was consistent:

*Government policy to rein-in liquidity, most notably new restrictions on the housing market, has driven demand down.

*Traders expected a post-Chinese New Year demand bounce that hasn’t happened.

*Anxiety amongst producers and traders is growing over the long-term direction of the economic policies of China’s new leaders.

For example in the toluene market, eastern coastal China inventories are at 100,000 tonnes compared with 30,000 tonnes in the second half of last year. This the result of traders taking aggressive positions on the assumption that demand for toluene into paint would continue to boom. However, demand for paint has fallen because of the construction slowdown.

“The animal spirits have gone out of markets and there is a great deal of caution about, but demand is there and demand will continue to grow very well,” said a polyolefins industry source.”

We think major structural changes mean that the problems extend way beyond just an absence of animal spirits – i.e. the speculation that add so much froth to markets in 2009-2010.

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