As China Stays The Course, Plan For Collateral Damage

Polyethylene18August2014

By John Richardson

LAST week’s $5-15/tonne decline in polyethylene (PE) pricing in China (see the above chart) is partly the result of negative sentiment created by the start-up of new domestic capacities.

In July, Shaanxi Yanchang China Coal Yulin Energy and Chemical brought on-stream high-density PE and linear low-density (LLDPE) plants, each of which have a capacity of 300,000  tonnes/year.

China Coal Shaanxi Yulin Energy and Chemical also started up its 300,000 tonne/year LLDPE unit in July.

Also preying on the market’s mind might be the arrival in Asia of volumes from the new  Borouge complex in Abu Dhabi.

The company’s 1.5m tonnes/year ethane cracker in Abu Dhabi is reportedly on-stream as tests are conducted in preparation for the start-up of the plants downstream of the cracker.

Downstream facilities include two Borstar PE units with a combined capacity of 1.08m tonnes/year and a 350,000 tonnes/year low-density PE plant.

But we doubt that the biggest concern is over new capacities, given that:

  • The new plants in China are coal-based. Doubts remain over how smoothly the coal-to-olefins process will run in practice. Plus their location is a long way from the major consumption markets. Logistics factors might, thus, limit disruption to these major markets even if the plants run smoothly.
  • The Borouge complex  is, of course, based on a conventional steam cracker. But the complex is only in the process of starting up.

We instead think a far bigger factor weighing on the mind of the market are heightened concerns over the credit slowdown following the release of the “shock” July lending figures. We put shock in inverted commas because we think that this should not have been a shock to anyone. Beijing’s policy direction has been crystal clear since late last year.

If you look at July lending data a little more deeply, growth in short-term corporate loans was a negative 236 billion Yuan, the first decline since 2010. These short term loans are the lifeblood of China’s small and medium-sized enterprises (SMEs), who make up the bulk of the country’s chemicals and polymers buyers.

Behind this alarming decline is, we believe, the “whack-a-mole” game being played by Beijing.

As it tackles excessive risk taking, in the shadow-banking sector in particular, the danger is that  short-term financing, i.e. letters of credit, will become even harder to obtain for both the good and bad SMEs. In other words, there will be some collateral damage.

Do you have  a plan in place to deal with collateral damage to some of your customers?

But, of course, what the government really wants to do is to get at the speculators.

Also weighing-on the mind of China’s PE market must surely be:

  • The 2O% rise in imports in January-July this year over the same period last year, despite a slowing economy.
  • The 12% increase in apparent demand (imports, minus exports plus local production) when H1 2014 is again compared with H2 2013.

These volumes might be tied-up in a type of speculation that China is trying to get rid of.

Other negative factors include the risk of a disappointing peak manufacturing season and a downbeat outlook for oil prices.

Do you have  plan in place for a disorderly destocking process?

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