China Commodities Rally About Protecting Existing Debt

Mono12Aug

By John Richardson

OVER the last few days we have focused on the increased risk-on trade in commodities, including petrochemicals.

But maybe the rallies we have seen  in products such as fibre intermediates and polyethylene (PE)  are mainly about traders being forced to increase their risk profiles in order to protect existing liquidity.

Here is the logic, with the help of fellow blogger Paul Hodges:

  • Suppose you are committed to a deal, say a property development.
  • You find you can’t get the credit you need to complete it because the PBOC is clamping down.
  • So, rather than risk losing the development, you take on more risk via petrochemicals purchases etc in order to get the credit you need to finish the job.
  • You convince yourself that in 90 days or 6 months’ time, when the payment on your commodity is due, you will have completed your development and sold it at a profit, because the government is bound to ease restrictions and so the property market will continue to boom.
  • You’ve been in this type of fix before, and it has always worked out okay in the end.
  • But suppose Xi/Li stay the course?  Maybe they are not like Hu/Wen who were always prepared to run to your assistance.  Then you are in big trouble, as your development won’t pay its way, and you may also lose money on your petrochemicals, too, as the economy goes temporarily into negative growth.
  • This could therefore be the final play of increasingly desperate people.  They have been used to gambling and the bets paying off – but this time, they have perhaps gambled once too often, and now face losing out in a big way.

Meanwhile, China’s mono-ethylene glycol (MEG) prices continue to rise (see the above slide).

This is despite Asian and Middle East plants running flat out and China’s polyester operating rates falling on squeezed margins, says Becky Zhang, the Asia ICIS pricing fibre intermediates and synthetic fibres editor.

Nobody knows exactly why so many traders have taken long positions in MEG when market fundamentals are weak.

But there is obviously something not quite right.

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