China’s Polyethylene Data: Credible Answers Required

PEAug4

By John Richardson

THE extraordinary data on China’s polyethylene (PE)  market will not go away. We need credible answers.

To begin with:

  • Imports were up by 20% in H1 2014 compared with the same period last year, according to Global Trade Information Services.
  • They were up by 33% in the first half of 2014 over H1 2012.

One explanation is that last December, overseas producers indulged in beautifying their calendar financial-year results with a great deal more than their usual vigour. During that month, sales to China were said to be exceptionally strong as inventories were minimised.

A shortage of shipping space meant that these cargoes were delayed and so delivery occurred in Q1, we have been told.

This would solve the data riddle if Q1 2014 imports – reflecting  the arrival of these delayed shipments – were greatly above those in the second quarter.

But this doesn’t appear to be the case: Q1 imports totalled 2.6m tonnes compared with 2.4m tonnes in the second quarter.

Another explanation is that the surge in imports was justified by a substantial slump in domestic production. There were widespread reports of a heavy turnaround season in March-June.

The problem with this argument is that:

  • Domestic production was also by 6% in H1 2014 over the first half of 2013.
  • It was 17% higher when the same comparison is made between 2014 and 2012.

When you add all of this together, we are therefore left with:

  • Apparent year-on-year demand growth (imports, minus exports plus domestic production) at 12%.
  • A 25% increase in apparent demand in 2014 over 2012.

A further reason not to worry starts with the argument that China’s official GDP numbers have long been a pretty hopeless guide to what’s happening in the real economy. The numbers are “man-made” because they serve political purposes.

Right now, it is in the interests of local government officials to under-report their province’s growth numbers because they have to be seen to be pressing ahead with reforms.

Previously, career suicide worked the opposite way as job security depended on over-reporting GDP growth during the investment-led “dash for growth” of 2001-2013.

This means that real demand growth for PE is higher than the headline official GDP numbers suggest, especially in the less-developed provinces of China that are rapidly playing catch-up with the eastern and southern provinces.

This logic stumbles on the nationwide impact of a slowdown in credit growth. Total social financing expanded by just 4% in H1 2014 over the same period last year, according to official government data. This is a long way short of what the government itself admits would be necessary to maintain last year’s rate of economic growth.

But lower credit growth, along with the government’s crackdown on speculation, could undermine the argument that the extra PE volumes are being uses as collateral in the property market.

Anecdotal evidence is also strong that Chinese traders, and the end-users who often double as traders, are short of credit and have lost their appetite for risk because of the government’s economic reforms.

But what if lots of new people are suddenly trading in PE? Have they slipped under the anecdotal radar? When people get desperate, or greedy, all sorts of strange things can happen. China’s metals markets, and possibly mixed xylenes, serve as examples of this.

If the collateral trading explanation is wrong, what is the explanation for this  extraordinary data on PE?

We need credible answers.

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