By John Richardson
A COMMON view is that Asia’s petrochemicals markets are merely suffering from a temporary destocking phrase, driven by the collapse in crude-oil prices.
So when crude oil prices settle down, everything will be fine.
Many people also assume that the current widespread “buyers’ strike” is the result of seasonal factors – i.e. December is always a quiet month as companies beautify their financial results before the end of the calendar financial year, and, anyway, in January, Chinese buyers always come roaring back.
Widespread production cutbacks in Asia also seem inevitable. They have already happened in benzene and in the polyester chain and cracker operating rates are now being reviewed. The perception or reality of tight supply has in the past often brought China’s buyers flooding back.
Hence, I’ve received half-a-dozen emails from traders over the last couple of weeks, asking me, “When should I go back in?”
I don’t think you should only be asking yourself when you said you go back in. It is also vital to ask yourself whether should go back in at all.
The biggest debate you need to have should centre on exactly why crude-oil prices have fallen. The collapse in crude is, I think, not just about temporary oversupply, but is also the “canary in the coal mine”. We could be heading for another global financial crisis.
Those involved in the cracker business should also look at the most-recent data for polyethylene (PE), the biggest and so most important ethylene derivatives.
If you look at the two charts above, you will see that:
- In January-October 2014 compared with the same ten months last year and in 2012, China’s production of PE rose by no less than 24% as imports surged by 18%.
- On a year-on-year basis only, local production was up by 10% and imports by 8%.
China has long carried the global petrochemicals industry because of this type of quite amazing growth in demand.
But we now know that much of this extraordinary growth was based on the “wealth effect” of very damaging credit creation – and we know that this era is now permanently over.
I also still worry that the year-on-year increases in PE imports, as local production also increased, have partly been driven by “collateral trading”.
Earlier this year, PE wasn’t always bought mainly for its value as a key ingredient for manufacturing, but was instead primarily a tool to raise finance for speculation in the shadow-banking sector.
The crackdown on shadow banking is now well underway, as the latest figures from the shadow sector show that lending is down by 30%. This suggests that China is very successfully playing its “whack-a-mole” game.
Just about every PE producer and trader I have spoken with over the last two weeks has heard anecdotal reports that inventory levels in bonded warehouses are low in China. This supports the notion that restocking is imminent.
But what if collateral trading has left PE stocks hidden somewhere else in the chain?
Sure, some degree of PE restocking in China might happen in January, but it feels as if it is going to be a trickle rather than the traditional January flood of customers coming back into the market.
The world is turning upside down.