China PE Recovery Lacks Firm Foundation

PEprices8June2013.jpgBy John Richardson

DESPITE a slight pick-up in China’s polyethylene (PE) prices over the last two weeks (see above chart), producers and traders remain gloomy about the immediate outlook.

“What has driven prices up is that new supply hasn’t hit the June market in volumes that people expected,” said a source with a global producer.

“Converters had held back from the market in May, expecting bigger volumes to arrive, and, as a result, have been left a little short of material. This has led to a mild flurry in buying.”

On 30 May, ExxonMobil reportedly announced that it had started production at its new 1m tonnes/year cracker at Jurong Island in Singapore, which will feed two 650,000 tonnes/year linear low-density polyethylene (LLDPE) plants at the same site.

“The problem is that the market had expected the cracker and the downstream plants to be on-stream in April,” the source added.

A Singapore-based trader agreed, adding that output from the ExxonMobil plants and Wuhan Petrochemical in China could soon substantially lengthen the market. Trial runs are expected to be conducted in June at Wuhan’s high density PE (HDPE) and LLDPE plants, the capacities of which are each 300,000 tonnes/year.

“Downstream demand in China also remains essentially very poor. People are on the whole still buying hand-to-mouth” said the source with the producer.

And the Singapore trader described 2013 to date as a “pretty much of a disaster for the trading community. We built up stocks before the Chinese New Year, expecting a recovery after the holidays that didn’t happen. Volumes have remained much below what most of us budgeted for.”

The problem is, of course, the “unexpected” slowdown in China’s economy. Back in February, many people had been betting on stronger rather than weaker economic growth.

“Stretch-film producers in China are, for example, suffering particularly badly because of the lack of demand for packaging material from the electronics sector,” continued the source from the PE producer.

“Export orders for computers, TVs etc seem to be way down on 2012 because of the state of the global economy.”

This wasn’t the impression created by the overall value of April export orders, which year-on-year surged by 14.7%.

But for several months now, customs data has been questioned because of claims of over-invoicing. Traders have been over-invoicing, mainly via Hong Kong, in order to smuggle hot money into China for speculation on property, say some economists.

On Saturday 9 June, what is likely to be the real state of state exports was revealed. May export orders were reported to have risen, year-on-year again, by just 1% – the slowest growth for 10 months. This follows a crackdown on over-invoicing by China’s General Administration of Customs.

Other disappointing macro-economic figures were also released over the weekend.

“China’s consumer inflation slowed to 2.1% [in May], the lowest in three months, while producer prices fell 2.9%, the lowest since September,” wrote Reuters in this article.

“A Reuters poll had put inflation at 2.5% and factory-gate prices down 2.5%.

” ‘The inflation data showed China’s economic growth continued to slow down. Q2 growth is probably even slower than Q1,’ said Jianguang Shen, chief China economist at Mizuho Securities Asia in Hong Kong.

“Separate central bank data showed that Chinese banks lent 667.4 billion Yuan in new loans in May, missing market expectations of 850 billion Yuan and lower than April’s 792.9 billion Yuan.”

Weaker-than-expected inflation might lead to an interest rate cut later this year, speculated Reuters.

But a rate cut wouldn’t fit with Beijing’s firm commitment to economic rebalancing, and so we don’t think it is likely.

Even if the cost of borrowing is lowered, this won’t necessarily be good news for the economy. The risk at this stage of the economic reform process is that easier lending conditions will result in more misallocation of capital to property-market speculators and inefficient state-owned enterprises.

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