After all the optimism, all the hype and a lot of investors' money, the industry has shot itself in the foot by failing to build demand ahead of supply.
Plus the negativity caused by food versus fuel and environmental counter-arguments to supporting this current generation of technologies is making some Asian governments hesitate on providing the support needed to bolster demand......
I sincerely hope not, but all the signs are there because of:
*A financial crisis which nobody again saw coming, this time with global implications
*What could prove to be too much spending on new equipment and capacity. This time high equity prices have paid for these investments rather than US dollar-denominated bank loans, as was the case in 1997.
The fundamentals are still strong, as today's article from ICIS news on share-price collapses points out. Asian demand is at much higher levels now than 11 years ago.
But the power of sentiment should not be underestimated.
It's too early to read the long-term effect on petrochemical pricing. More volatility seems certain with sentiment driving shifts in pricing on every piece of negative or positive economic and stock market news.
Lower feedstock costs on cheaper oil will also play a role, but as the extended article below points out, the impact on the real economy will take time to assess. It is this impact that will set the long-term direction and determine whether we the downturn has, finally, arrived.
....You might have to be to be able to afford this lot in a few years time (at least in some inflation-battered and collapsed local currency)
Thanks to Mark Berggren of MMSA for pointing out this wonderful quote: "Foreign aid might be defined as a transfer of money from poor people in rich countries to rich people in poor countries"
Douglas Casey, Classmate of Bill Clinton at Georgetown University
The tremendous economic boom of 2000-2007 in emerging markets might have also left millions more behind than had been previously thought as increased wealth from local prosperity - rather than from stealing foreign aid - has ended up in the hands of the middle classes.
For example, the ADB believes that there are 20.1% more people in poverty in Indonesia and 15.9% more poor people in the Phillipines than it had previously thought.
The great petrochemical hope in the sky has been India, but how can a country with terrible infrastructure, poor irrigation and very low literacy rates ever give the majority of its people the joyous pleasure of buying plastic bags? The World Bank estimates that 455 million people have to get by in India on $1.35 or less a day.
The point here is that inflation will eat into all the rosy forecasts for petrochemical demand growth that were around as recently as the first quarter of this year.
How long-lasting will the damage be to growth? The answer could be how long oil prices remain elevated which comes back to your view on supply and demand.
Surging oil prices on the well-documented supply problems are big factor behind rising food costs. This is either directly through higher transportation and fertiliser bills or indirectly through the nonsense of first-generation biofuels industry in the West taking away land from food production. Plus you have the problem of all those newly middle class people in countries such as India eating more meat.
I don't think the recent fall in crude prices changes anything. This is just a temporary correction based on weaker demand growth. When there's an economic recovery, the supply shortage could quickly result in another downturn - hence, constant volatility above a high price floor.
I wish had bought shares in agrochemical companies a few years ago.
A drowning man will grab hold of any floating debris - even a plastic bag made from standard-grade Chinese polyethylene (PE).
The president of Sinopec Corp, the Hong Kong-listed arm of the Chinese refining and petrochemical giant, was quoted in press reports as saying that projects that had already been postponed would be suspended indefinitely (taken as a face-saving euphemism for cancellations). He also reportedly said that the pace of other projects would be adjusted.
"Fantastic. At last we are seeing some commonsense," said a Singapore-based executive with a Western polylefins producer.
Sadly, though, only a few days later, Tianpu amplified his statement by saying that 2008 petrochemical expenditure would be cut by only $675m - amounting to much less than the cost of one cracker.
The excitement that greeted his first statement was the result of concerns over just how bad conditions could become over the next few years.
The hope was that a much bigger budget cut might take place - affecting the timing, or even the continued existence, of projects slated for commissioning in 2009 and beyond.
ICIS Plants & Projects estimates that 21 per cent of global ethylene capacity additions in 2008-12 will be accounted for by China.
The Middle East will be responsible for a further 36%, resulting in worldwide C2 capacity increasing to 156.3m tonne/year from 135.5m tonne/year.
China has every strategic reason to push ahead with more petrochemical capacity, even if growth looks precarious on the back of the likely frequent boom-and-bust cycles created by tight crude markets.
And we all know about the Middle East advantage, even if it might be eroding a little on tighter feedstock supply and higher capital costs.
"The knowledge society will strike back - eventually. Energy efficiency and renewable energy will be rewarding projects," says Norbert Walker, Chief Economist at Deutsche Bank in his Asia Trip Report 2008.
So if you are not in the Middle East and not in China, are not moving up the innovation curve or don't have good refinery-petrochemical integration (ideally, you will have a combination of all the above) you are in big trouble.
You're only option is to sell your business to some gullible fool during the next up cycle -but you'll have to be quick as the recovery is unlikely to last for long!
Herein begins an occasional series where I offer advice on how to make a little cash.
By the way, is it me or do I get the sense that a lot companies haven't woken up to the severity of the crisis we are in? A recovery this, and I think quite probably next year, is out of the question. We need to find new sources of growth to replace the US consumer who isn't going to start spending money again in the same volumes as before for a good many years.
Anyway, here is my handy tip: purely by coincidence discover one day that quite fortuitously you have priced your local product so high - way above international levels - that this has attracted competitively priced imports. Take advantage of this wonderful, joyouous happenstance, this glorious instance of serendipity and lodge an antidumping petition.
"Nobody can see until the end of the month - never mind into the third quarter," commented an olefins trader recently.
"The reason is that very senior managers are too busy micro-managing everything, from getting involved in trying to track commodity chemical price direction to insisting on signing off every expenditure over a few hundred dollars.
"The problem with these senior guys when they track markets is that they are so out-of-the-loop - assuming that they have ever actually been in the loop - that they don't know what they are doing."
I heard of one big company where the CEO has even insisted on signing off travel authorisation to next week's APIC conference in South Korea.
In these days of tight credit and collapsed sales, it's understandable that much tighter control on spending is essential.
And during the boom years, can we all honestly say that every single trip we made was entirely commercially justified - and that we were always sufficiently foused on the bottom line to get maximum value out of each trip? Look back at your old expenses forms and count up the number of genuine "drinks with Mr Kim" entries.
It will be interesting to see how the lessons being learnt today will be remembered when the economy has fully recovered.
But from a HR perspective, a tough sign-off regime needs to be well-communicated.
So does the senior guys tracking shifts in chemicals pricing - whether competently or incompetently - otherwise the workers on the ground are likely to become demoralised.
They are unlikely to be able to leave in this current climate, but will surely perform far worse if they feel their opinions are being ignored for no good and well-explained reasons.
Off-the-record, of course, how does your company measure up?
And did you fiddle your expenses during the good times?
Source of Picture: http://blogs.suntimes.com/ebert/
We have just started doing our research and so more details later - but see attached this Excel spreadsheet - lendingVDalianOI.xls
It compares the increase in lending from China's banks with the amount of open interest in the Dalian Commodity Exchange's linear-low density polyethylene (LLDPE) futures contracts.
Volume traded on the exchange has risen to mind-boggling heights this year - 99.9% of which is cash settled involving no intention by either party to provide or receive physical delivery.
As you can see from the Excel, when lending rises in one particular month the following month has seen increases in activity on the exchange.
Up to July 17, open interest on Dalian was at Yuan250bn with lending rising by Yuan1.43t trillion in June.
If July carries on its current pace Dalian activity might well exceed that in June after only Yuan664.4bn of credit was issued in May.
"An increase in available credit in China normally takes about a month to find its way into people's pockets and so there may be a correlation," a friend who reports on the financial industry told me over the weekend.
"It would be interesting to also compare the rise in credit with the response of local stock markets (up by around 80% from their November lows) and other physically and paper-traded commodities."
The other way to look at it could be to take the overall rise in credit this year to see the year-on-year influence on markets. This should also include the property sector, which, according to The Economist, has seen home purchases rise by 80% up until June.
Those who speculate on the stock market are likely to also to chance their arm on property - with some of these same gamblers also chemicals traders (so you might seeing switching of exposure between different markets, leading to dips and rises in activity that doesn't always respond in simple straight lines to increased credit; in other words keep it simple by just looking at the effect of the overall rise in lending).
Our obvious next step is also to see if any similar pattern has emerged in "physical" PE markets.
This might go someway towards answering the concern that the price recovery - which still shows no signs of faltering, according to ICIS pricing (see slides below) - involves a great deal of speculation.
"Here's your entire allocation for this month"
Source of Picture: Adammakwright.wordpress
In the words of a plastics converter from the Philippines: "Markets are so tight at the moment that we are left to pick up the crumbs. Suppliers are concentrating almost entirely on China."
The converters have been waiting for so long for the great supply surge to tip markets in their favour that forecasting is becoming a joke.
"You told me last year that by now I'd be in heaven," added the same converter.
But surely sometime soon it must change.
This converter and many thousands more like him will then enjoy the sweet taste of revenge (that's, of course, as long as China doesn't go belly up. In such an event the last company left standing wiill need to swtich out the lights on the way out of the proverbial room.
Source of picture: www.msnbc.msn.com/id/23512037/
CHINA is making export gains at the expense of other higher-cost competitors that might not be sustainable because of reasons including rising trade protectionism and economic rebalancing.
Chemical companies need to factor in this risk - and take into account how overall demand might merely be shifting location rather than increasing.
Knit apparel is a good example where, according to this article by David Barboza in the New York Times, American imports from China jumped by 10% in July this year compared with the same months in 2008.
This was as US imports from Mexico, Honduras, Guatemala and El Salvador fell by 19-24%. Barboza was quoting data from Global Trade Information Services.
It is not just emerging markets that are suffering as a result of China's increasing dominance in textiles.
The beleaguered European industries are also in the firing line with the EU evaluating extending antidumping duties on imports of shoes from China and Vietnam.
"Reductions in raw-material import tariffs and increases in export-tax rebates have helped Chinese apparel producers push their prices down," said said Ying Min Ye, president of Beijing-based Chem1 Consulting at the Downstream Asia Roundtable Asia oil and gas event in Kuala Lumpur. Malaysia.
The conference, organised by the World Refining Association, took place earlier this month.
You can add to these advantages a Yuan which is now being pegged to the US dollar, resulting in steep depreciations against other Asian currencies. Between March and September, the Yuan had fallen in value by 10% against a basket of Asian currencies, said Barclays Capital.
A further huge advantage is, according to Nicholas Lardy of the Peterson Institute for International Economics (quoted in the same Barboza article), flexibility in labour markets.
This means the ability to cut wages without worrying about troublesome trade unions or restrictive employment legislation.
The biggest comparative boost of all might well be the flood of cheap lending. China has pump-primed its economy through a huge increase in bank loans.
The US removed safeguard duties against imports of several categories of Chinese clothing last December, according to a new report from Textiles Intelligence, providing China with another edge.
The EU removed similar safeguard duties in December 2007.
Both sets of duties were the result of damage caused to local industries when The Agreement on Textiles and Clothing (ATC) came into effect on 1 January 2005
Here, therefore, could end some of the head-scratching over steep increases in fibre-intermediate pricing in 2009.
Restocking and crude oil have been important factors.
What might have also benefited the market are China's gains at the expense of others.
The country's yarn output grew by 9% in the six months to June 2009 over the same period last year, Yin added at the same event.
Fibre output rose by 10% and polyester production by 13%. Click here for a copy of his full presentation - .5 Yingmin Ye 1.pdf
It's not just in low-end clothing where China is making gains, but also in electronic goods - at the expense largely of the Japanese.
Japan has seen its share of electronic-good exports to the US fall by 18% in 1999 to 7%, added Barboza.
In the last year alone, China's market share of the US electronics goods market has doubled from 10% to 20%.
Sales of electronic materials to China were up by 15% in Q3 over the second quarter, said Andrew Liveris, CEO of Dow Chemical, when the company's third-quarter results were released last week.
Coatings and infrastructure sales rose by 16%, polyethylene (PE) 10% by and the automatic sector 5%, he added.
From a Dow perspective, if it's taking sales away from Japanese electronic chemicals companies all well and good.
But displaced demand doesn't necessarily add up to greater overall demand.
Another important point is that when all is said and done, China's exports as a whole are still down on the first half of 2008.
China exported $521 billion worth of clothes, toys, electronics, grains and other commodities in H1 2009, according Barboza.
Although lower than declines suffered by other exporters such as Japan and Germany, this figure still represented a 22% fall over the first half of last year.
Returning to the theme of winners and losers from China's boom, Australia - despite seeing its currency rise in value by 40% against the Yuan in March-September - has made big net gains through a surge in commodity exports.
It's the same story for Indonesia.
"Commodities and high-tech goods have gained [because of the recovery in China]. But anything in between, China can often produce itself, so countries in these areas are under more pressure," said Tai Hui, an economist at Standard Chartered in Singapore in this article from the Financial Times.
Malaysia and the Philippines were losing out because they competed directly with China in many export markets, he added.
"Market stability has improved, but we continue to remain cautious about the ability of some economies to sustain growth," continued Liveris when the Q3 results came out.
"This is especially true of the US and Europe, and until these economies return to 'normal', we believe global growth will be muted."
This is also especially true of China.
Last week we discussed how domestic consumption was much less than investment as a driver of January-September GDP (gross domestic product) growth.
The relatively high investment component of GDP points to several risks and concerns:
*An increase in export-based industrial capacity. Now that it's on the ground, China will be tempted and able to keep this capacity running, even in very weak market conditions
*At the moment the US seems to be more worried over China's willingness to keep on funding its huge deficits than damage to jobs caused by aggressively cheap imports. But how long will this last as unemployment climbs towards 10%? Could we see a big increase in trade protectionism?
*Bubbles in real estate and equities. Real-estate prices have risen by 73% so far this year. Confusing signals are emerging from the government over whether or not monetary tightening will occur in 2010. Leave it too late and these bubbles could get more out of hand; act too hastily and the economic rebound will be set back
*Assuming that the investment number reported for Q1-Q3 also includes money spent on stockpiling oil and other commodities, will the high levels of imports continue? Monetary tightening is a threat along with sudden dips in import demand as China starts running off inventories
*Meagre underlying growth in domestic consumption. Nominal GDP only increased by 4.7% in the first nine months of this year, indicating that deflation was behind the higher headline number of 7.7% Although a lot of people might have made theoretical and real money out of real estate and equities, this doesn't suggest a healthy state of affairs for the average worker.
A weaker currency, import tariff rebates, increases in export taxes and soft and plentiful bank loans for new capacity hardly suggest rapid economic rebalancing towards domestic growth.
Has China put in place the right policies to move quickly enough towards this rebalancing to keep the rest of the world happy?
Can it move any quicker given the country's social and economic pressures?
The implementation of a zero-tariff regime in Asean from 1 Jauary 2010 has raised concerns among polymer producers in Indonesia and the Philippines about intense competition from Singapore and Thailand leading to a erosion in market shares.
Producers from these two countries are lobbying to defer or block implementation of zero tariffs. But a trade lawyer says the going will be difficult.
"I have heard that Indonesia is pushing for a postponement of the new duty structure. Even if the government agrees the customs department is not prepared as [new] forms are not ready," says one Singapore-based exporter.
But Edmund Sim, partner with Appleton Luff, points out that it would be difficult for Indonesia to renegotiate as the agreement has already been ratified. "It is pretty much impossible," he says.
Pic source: Fotopedia
"What is allowed under the free trade agreement (FTA) terms is for a country to suspend tariff concessions if it can be determined that increased imports have caused injury or economic damage to local companies. But in the history of FTAs this has very rarely been implemented. And even if this is put place it would be a temporary measure - say for a period of 3-5 years," says Sim.
The second option is to go for antidumping action.
"If the industry is worried about a flood of imports they can go in for this option by proving that pricing was unfair and that the local industry suffered material injury. This type of action is possible and can be extended for an indefinite period," says Sim.
But this is an expensive option because of high legal fees and it takes time to enforce. Companies also have to wait for a few months before they can initiate action.
"You have to build a record. You cannot say on 2nd January that there is dumping. You need time to build the case; usually 6-8 months is enough to get data to make a claim," he points out.
"The simple option [of raising import duties] ended when the FTA was signed. Now they have the safeguard option, which is untested, or antidumping, he adds.
Besides the Asean FTA, Indonesian media has reported that companies are also asking for a delay in the implementation of the Asean-China FTA, which comes into force from 1 January 2010.
There is a provision in the Asean-China FTA for a temporary delay in tariff reduction by reclassifying goods as 'sensitive' and 'highly sensitive' products. The duty elimination could then be delayed to 1 January 2015.
But the problem for Indonesia is that there are limits on the number of 'sensitive' and 'highly sensitive' products and the deadline for classifying goods was back in 2004, points out Sim.
It is also uncertain whether China and other Asean countries will allow Indonesia to deviate from the FTA.
"Either way, for Indonesia to delay tariff elimination will require some agreement by the other Asean members and China [in the case of the China-Asean FTA] otherwise Indonesia will be in breach of its legal obligations," says Sim.
By Malini Hariharan
Some projects never die.
JG Summit has been planning a cracker since 1995 but has always had problems in securing funding. The project was revived in 2005 even as questions were raised about its viability.
It would help JG Summit secure feedstock for its polyethylene and polypropylene plants, but how would it compete with larger well-established players in Singapore and Thailand, especially after the implementation of the Asean FTA from 1 January 2010 when import tariffs would fall to zero.
The market meltdown in the second half of 2008 had pushed the project to the back burner. But with economic recovery the project has once again reappeared.
JG Summit says that it is close to receiving funding from the Export-Import Bank of Korea for a 320,000 tonnes/year cracke at Bataangas.
Lance Gokongwei, president of JG Summit Holdings told reporters in Manila this week that the company was pushing ahead with the estimated $731m project. "We expect to operate the plant in 2013," he said.
Gokongwei said JG Summit had already signed an agreement with Lumus for technology and site and design development would start in March 2010.
"If the financing package from the Korea Eximbank is completed by May to August next year then the project is a sure go," Gokongwei said.
"If we can't get the financing, we will have to assess. The fallback is we wait for the right time," he added.
That sounds familiar.
By John Richardson
Polyolefin shipments have been held up in ports by lack of awareness among customs officers at some ports in Southeast Asia over how to implement new free-trade deals, an industry source told us.
It seems highly likely that the same applies to other chemicals and polymer cargoes.
The Association of Southeast Asian Nations Free Trade Area or AFTA agreement came into force on 1 January, as did the China-ASEAN deal or ACFTA deal.
They involve zero import tariffs on shipments of most goods between ASEAN's founding members - Indonesia, Thailand, Singapore, Malaysia the Philippines and Brunei, and between these same six countries and China.
"Lots of containers of polyolefins have been stuck in ports because customs officials are not aware of how the new trade agreements work," claimed the industry source.
"The muddle over how the new trade-agreements are supposed to work does, on the face of it, seem extraordinary when you are consider that they have been many years in the making. For example, the terms of the ACTFA were agreed eight years ago.
But a well-informed source told us: "What is needed is more well-trained staff to help with the implementation, but the budget for the ASEAN Jakarta-based secretariat is only $15m a year.
"The reason it's so low is that contributions are pegged for each country at what can be afforded the poorest members, such as Laos and Cambodia."
Equally strange seems to be the complaints from Indonesia's polymer producers and from the country's manufacturers in general over the impact of the agreements.
"The industrial sectors in Indonesia and the Philippines, and to a lesser extent Malaysia, vehemently objected to greater market access and greater competition - not when the agreements were being negotiated but during the waning days of 2009," wrote Edmund Sim, a Singapore-based trade lawyer, in a recent article.
In an interview, Sim - partner with the Singapore branch of international law firm Appleton Luff - added: "The delays were partly because all the details of the deals are easily available on the internet.
"Government officials therefore assumed that industry executives would be fully across the implications.
"This wasn't the case until the actual effects of the FTAs became more apparent as the implementation date drew near.
"Another problem in Indonesia was that people were distracted by the presidential and legislative elections, which took place last year."
Sim had told us before that those who are complaining will pretty much have to, as we say in Britain, "like it or lump it", because the likelihood of these deals being renegotiated is very low.
And so, as he explains in this ICIS news article from yesterday , we can expect more antidumping cases in 2010 from disadvantaged countries such as Indonesia and the Philippines.
By John Richardson
AS the blog had anticipated would happen, there were sharp retreats in some chemicals and polymers pricing late last week on the steep declines in equity and crude prices.
Polyethylene (PE) fell by $70-130/tonne, according to our colleagues at ICIS pricing, as the Dalian Commodity Exchange once again demonstrated that it has become a major influence.
Many industry sources now tell us that PE in general (the Dalian has an influence across several different grades) has almost become a financial instrument; in other words, its day-by-day and week-by-week price in China moves in line with the Dalian as the Dalian moves in line with crude oil and equities.
Therefore, you could draw a neat line between last week's dip in PE pricing and the retreats in crude and equities as investors took flight.
Towards the end of the week equities and oil regained ground as confidence reportedly grew that Beijing's measures to tackle rising consumer-price inflation would have a limited impact on the broad economy.
The recoveries were also said to be the result of greater confidence that a rescue package would be successfully agreed for Irish banks.
In parallel, Dalian saw four consecutive days where the futures contract fell beyond the maximum allowed in one day's trading, forcing trading to be suspended, before a recovery on Thursday.
Source of picture: Inoldlasvegas.com
Polypropylene (PP), too, retreated on the influence of Dalian but by a more modest $10-20/tonne as traders seemed to be in a comfortable position to try and ride out the negative sentiment.
Propylene was more steeply down, by $20-70/tonne, as it reacted to the dip in crude futures.
But there seem to be factors specific to the C2s markets sufficient to override the overall sentiment which kept ethylene stable.
Click here for these numbers in graph form -
This reaffirms our view that this market has become very hard to read because of more extreme shifts in spot cargo availability.
Benzene, perhaps the mother of all chemicals, was down $15-50/tonne but interestingly, paraxylene (PX) staged a rally later in the week as market participants had time to react to the recovery in equities and crude.
One of the big macro questions is whether China will, indeed, get it right by taking targeted measures that are sufficient to bring inflation under control.
This article from the Wall Street Journal suggests, rather worryingly, that China is now running out of ammunition to fight the hot money flowing into its economy - which at risk of continuing as long as quantitative easing lasts.
Every mood swing in equity and commodity markets is bound to find a reflection in chemicals and polymer markets over the coming weeks as the prospects for next year seem exceptionally uncertain.
By John Richardson
THE earthquake and tsunami that hit Japan on Friday afternoon is still hard to take in. We send our sympathy to everyone connected with this disaster and just hope and pray that the rescue efforts go exceptionally well.
As Japan returns to work this morning it will confront the huge cost of rebuilding at a time when its economy is struggling with slowing growth and lack of confidence in the government.
But this is a country that has overcome huge obstacles in the past and we are sure that history will repeat itself.
It seems almost in bad taste to talk about the impact on refining and petrochemicals, but of course life has to go on.
And so we have been trying to piece together the impact on these two industries both in Japan and elsewhere.
Petrochemicals plants at Ichihara, Chiba prefecture, and Sendai, Miyagi prefecture were reported to be still on fire 15 hours after the disaster occurred.
Chisso Corp's Goi Complex, which includes polyethylene (PE) and polypropylene (PP) plants, is at Ichihara.
Maruzen Petrochemical shut down its 480,000 tonne/year crackert at Chiba, east of Tokyo, after the earthquake.
Keiyo Ethylene shut is 690,000 tonne/year cracker at Chiba.
Keiyo Ethylene Co is 55 percent-owned by Maruzen Petrochemical and 22.5 percent each by Mitsui Chemicals and Sumitomo Chemical.
Idemitsu Co, Showa Denko and Mitsubishi Chemical are also reported to have closed down plants in order to carry out test.
Some 1.7m tonne/year of ethylene capacity is thought to be off-line.
There was also a fire over the weekend at the chemical factory of JFE Chemical in the Chuo ward in the city of Chiba, Chiba prefecture.
JFE Chemical produces coal tar, benzene, toluene and xylene and industrial gases including oxygen, nitrogen and argon.
JX Nippon Oil & Energy shut its paraxylene facilities in Kashima, Ibaraki prefecture, with a combined capacity of 600,000 tonnes/year, and in Kawasaki with a combined capacity of 350,000 tonnes/year.
Around 1.2m tonne/year of refinery capacity is thought to be also shut down. These include three JX Holdings refineries, one refinery operated by Cosmo Oil, another by TonenGeneral Sekiyu and a final one run by Kyokuto Petroleum.
The 220,000 tonne/year Cosmo refinery, which is at Ichihara, was reported to be on fire.
Japan is a major importer of naphtha and so crack spreads elsewhere will be under downward pressure due to the drop in demand.
Ten naphtha vessels were said to be heading from Europe to Japan when the disaster happened.
This could add further length to a European market that was already struggling to cope with oversupply.
By John Richardson
NEW banking regulations could severely restrict the ability of small and medium-sized (SMEs) companies to access trade finance. This would hit Asia particularly hard, as the majority of chemicals and polymer business involves SMEs.
Under the Basel III regulations, due to be phased in from next year, a three-month trade finance loan will be treated the same as a one-year loan. This will force banks to hold more top quality capital against this type of lending, according to the Financial Times.
This is deterring some banks from staying in the trade-finance business and could increase the cost of letters of credit by 300 percent or more, adds the newspaper.
Some French banks have already decided that the extra regulatory burden is not worth it, and so they have withdrawn from the trade-finance business, says the FT.
"Basel III's implementation could have unintended consequences for trade financing through the proposed leverage ratio, which would require banks to set aside 100 percent of capital for any off-balance-sheet trade finance instruments, such as letters of credit," says the World Bank.
"This is five times more than the 20 percent credit conversion ratio used for trade finance in Basel II. New capital regulations would also require banks to set aside capital for one year for any instrument, even though that security may carry a maturity of under a year. Most trade finance instruments have maturities of about 90 days; this would triple the capital cost of such instruments."
Trade finance volumes could fall by 6 percent, representing a $270bn a year reduction in global trade and a 0.5 percent decline in global gross domestic product, the World Bank adds.
'Eighty-five per cent of all letters of credit will have Asia at one end or the other," said Andy Dyer, managing director of transaction banking in Asia Pacific for ANZ, in this article in Singapore's Business Times.
By John Richardson
POLYOLEFIN markets are not going to bottom out until August-September at the earliest, according to several producers and traders who the blog spoke to yesterday.
And even if prices do eventually stop declining, confidence has all but disappeared that there will be any substantial recovery in either pricing or demand for the rest of this year.
We were also told that:
*A major Chinese trader is not taking positions anymore because it cannot predict where the market will go over the next week, never mind the next month. This is unprecedented. It is only buying from producers when it receives firm orders from customers.
*Middle East offer prices to China keep falling. For example, one Middle East producer has reportedly just offered linear-low density polyethylene (LLDPE) for end-May/early June delivery at $100/tonne lower than its previously contracted price.
*Even discounted Iranian material, mainly low density PE (LDPE), cannot find a final home in the China market. As a result, it is being re-exported from bonded warehouses to Indonesia, the Philippines, Australia and Vietnam - possibly even South America.
*We have received further confirmation that smaller traders in China have been buying and then immediately selling polyolefins at losses, in order to get the cash necessary to fund property deals. This is the result of restrictions on banks that prevent them from lending to the real-estate sector. For instance, PE and polypropylene (PP) was recently bought for Rmb9,800/tonne and immediately sold at Rmb9,600-9,700/tonne.
This page contains an archive of all entries posted to Asian Chemical Connections in the Philippines category. They are listed from oldest to newest.
Olefins is the previous category.
Polyolefins is the next category.
Many more can be found on the main index page or by looking through the archives.