By John Richardson
ASIAN chemicals markets have gone through another sequence of inventory building that will once again be followed by a period of disorderly de-stocking, warns Paul Satchell, UK-based chemicals analyst with investment and investor services firm, Cannacord Genuity.
“The gradual demand improvement through 1H14, followed by another decline looks to be simply the latest sequence in a pattern which has been in place since mid-2010, in our view,” he wrote in commentary that accompanied is 13 August Volume Proxy (the Volume Proxy gauges volumes, and thus demand, through weekly changes in 33 spot chemical prices in the US, Europe and Asia, as assessed by ICIS).
“True demand fundamentals have been fragile for so long that inventory cycles have become the prime determinant of marginal demand,” Satchell added.
“Hence, the rare periods where volumes (in basic chemicals) have been decent have coincided with periods of robust outlooks for oil prices. Naturally, these have been followed by de-stocking when oil prices softened.”
The outlook for crude oil was now downbeat, with the sharp decline in the Asia Volume Proxy index (see the above chart) lending further support to the Cannacord argument that the peak manufacturing season in China would likely to be disappointing, he added.
We also believe that inventory building in China in polyethylene (PE) and mono-ethylene glycol (MEG) has been by traders anxious to get hold of foreign lending. This credit has probably found its way into the shadow banking system and the real estate sector.
The logic here is twofold:
1.)These imports appear to make sense to lenders as China is in substantial deficit in PE and MEG.
2.)Foreign credit is now the only way to go because of the determined, evolving clampdown on the various domestic sources of lending.
Might other chemicals and polymers also be involved in this “collateral trading” in China?
When this trading unwinds across all commodities, what will be the damage to the global economy?