Dear blog reader – a technical error, beyond our control, means that we are unable to upload the tables and graphs for today’s post. Watch out next week, as, when the problem has been solved, we will add the missing tables and graphs. Apologies….
By John Richardson
THE sustainability of the strength in China’s polyethylene (PE) market is being questioned.
Firstly, as my ICIS pricing colleague Chow Bee Lin, wrote in her Asian PE price report last week: “The recent weeks of PE resin price hikes had left many plastics processors grappling with squeezed margins, which in turn fuelled their resistance against the current spot prices and further price hikes.”
These comments were supported by a polyolefin industry source who told the blog on Monday that the market may have reached a plateau because of downstream margin problems.
“We are also approaching the end-of-year destocking season, when both producers and traders want to keep inventories at a minimum because of financial-reporting reasons,” he said.
And, as we discussed on Monday, the market needs to absorb considerable amounts of new capacity, even before the post-2017 surge in US capacity.
If the outlook on demand was more favourable, then these supplies would not be causing such concerns, we believe.
Paul Satchell, the UK-based chemicals analyst, believes that the outcomes of the plenum could be a further trigger for destocking. We then might find out how much of this year’s 14% apparent PE demand growth in China (local production plus imports) is real demand.
Above and beyond the specifics of the PE market, it might also be the case that a mini commodities Supercycle (prompted by a government stimulus package that was also described as “mini”) is close to its end.
A late October report, by Westpac Securities’ Phat Dragon service, provides support for this argument.
“The predictable cresting and then decline in the growth rate of railway investment is now conclusively underway, and will be a drag on the (progressively broadening) categories of transport, infrastructure and tertiary industry capex through the end of this year and in the first half of 2014,” wrote Phat Dragon in that same report, which was quoted in this Macro Business article.
“The factors holding up those important categories, in the face of the rail slowdown, have been accelerating outlays on highways and continued high growth in the strategically important (and massive) utility and environmental management complex,” continued Phat Dragon
“Yet even here there are signs that a peak in growth rates has been reached. Phat Dragon observes that the growth in the value of new projects across the urban economy has slowed quite abruptly, to be well below that of ongoing work, implying that the pipeline is being replenished at a rate that is insufficient to maintain current growth rates.
“A rolling over in the growth of centrally-approved and SOE capex is consistent with that inference, as is the observation that the investment upturn has been relatively narrow (i.e. very large project size, but fewer of them), which made it fundamentally vulnerable once the swing sectors saw their momentum crest.”
Steel prices have weakened over the last three months. This might have some wider relevance.
Some PE market players will hope, of course, that whatever the outcomes of the November plenum, China’s leaders will continue to kick the can down the road through further fiscal stimulus – once the impact of this year’s boost peters out by around Q2 2014.
But, interestingly, despite the renewed property bubble so well-described by fellow blogger Paul Hodges on Wednesday, Macrobusiness wrote in this second article: “One of the mysteries of this year’s Chinese rebound has been why property developers have not yet followed rising prices with rising starts. That may be turning now which will support iron ore demand, provided the coming clamp is not too tight.”
Perhaps the answer is that the government wanted to prevent the failure of property developments already underway while at the same time discouraging new projects that would have added to property oversupply?
Or maybe the screws have already been tightened on the property sector now that bubble has entered another dangerous inflation cycle?
Further lending for property, for the time being at least, seems unlikely to be made available, because domestic Chinese banks had already hit their 2013 loan targets following excessive real estate lending in the last couple of months, said Jim Reid, strategist with Deutsche Bank.
He added that there were reports that domestic loans to property developers had jumped 50% in September from a year earlier.
But still, might China be tempted, come the second quarter of next year, to once again put its foot on the stimulus peddle?
Debt problems are another reason to think that they will at least hesitate before even repeating the “mini” stimulus of 2013.